From Fees to FOMO: The Biggest Australian Equity Fund Mistakes Explained

If your portfolio has a home-town bias, you aren’t alone. Typically, Australian investors have a high allocation to domestic equities – even on an institutional level – and for a range of reasons. Think familiarity, access to franking credits and solid returns in recent times.

Bear in mind though that the Australian market represents only around 2% of market capitalisation. That hometown bias could be just one of many mistakes costing you in your portfolio.

Some examples of other common mistakes hurting your hip pocket include concentration risk, paying too much for the funds you use, or failing to manage franking credits from your investments.

Here’s what you need to know and how to avoid it.

Mistake 1: Concentration and Diversification

The biggest growth market in the world today is technology. Guess which sector Australia is underrepresented in?

The Australian economy is heavily reliant on Financials and Resources; accordingly you’ll see this in the top 200 companies by market capitalisation. Investing without thinking through concentration and adequate sector diversification can see investors struggle with commodity prices weighing down the big miners in their portfolios or being hit by any challenges in the financial sector, particularly with the Big Four Banks.

To avoid a portfolio overly concentrated on these sectors, try to minimise cross-over in the Australian equity funds you select. For example, if you already hold a large-cap focused fund like WAM Leaders (ASX: WLE), instead of selecting another large-cap fund, you might look to mid-caps or small-caps, such as Seneca Australian Small Companies Fund which might hold exposure to sectors less available in the larger companies.

Or alternatively, if you are selecting two large-cap funds, you might look through the holdings to minimise cross-over – consider different styles and investment approaches. For example, using a high conviction value approach like Firetrail Australian High Conviction Fund might be complementary to a growth-oriented fund like Glenmore Australian Equities Fund where you are less likely to find much crossover in stocks. Or you might mix passive approaches such as a core ASX holding, alongside a targeted active approach to offer dividends or contrarian ideas.

Considering your concentration and diversification may also be a trigger to think beyond Australia to the international equities portion of your portfolio.

Mistake 2: Paying Too Much in Fees

Not exclusive to Australian equity fund investors is the concept of overpaying for what you are investing in.

Remember that fees do not guarantee returns and your portfolio may not need a complex strategy with high fees. If a simple exposure to Australian equities is enough based on your strategy and objectives, then you may find investing in a passive fund, such as iShares Core S&P/ASX 200 ETF (ASX:IOZ) with an annual management fee of 0.05% may be optimal for your portfolio.

Even within passive exposures, though, take the time to regularly review your options for your exposure. As technology as improved over time, ETF issuers have been able to issue more cost-effective passive exposures than in the past.

If an active strategy is right for you, spend the time looking through the product disclosure statement for the full extent of fees. Some active funds may also charge additional performance fees on top of management fees that can erode your returns. This may mean a similar active fund with similar performance but no performance fees could offer better returns.

Mistake 3: Failing to Consider Tax and Franking

A significant benefit of investing in Australian equity funds is the opportunity to access franking credits. These can dramatically change the returns you receive and should be accounted for in your tax returns.

A quick recap on franking credits as it’s easy to forget the basics. Australian companies can choose to pay tax on the dividends they pay out and then apply a franking credit on that tax that you are able to use in your tax return. This can be a full credit (based on the company paying the 30% company tax rate) or partial and is used to offset your marginal tax rate. If you don’t pay tax, for example, retirees, you can claim a refund on the tax paid.

Forgetting about franking can cost you.

You should check your tax statements from your funds for any applicable franking credits. It’s also something to consider when you are selecting a fund. Some funds specifically invest to optimise income using franked dividends and if you are an income investor, this is worth spending the time on researching.

Some examples of funds that specialise in investing in companies that offer franked dividend companies include Betashares Australian Dividend Harvester Fund (managed fund) (ASX: HVST) and Plato Income Maximiser Ltd (ASX: PL8).

Mistake 4: Chasing Past Performance (Fear of Missing Out)

Another mistake common to investing in any asset is chasing past performance. Just because a fund has offered stellar returns in one year, doesn’t guarantee it will do so again.

In saying that, it doesn’t mean that performance doesn’t matter. Persistent bad performance in a fund can increase the likelihood of continued bad performance, according to some studies. When it comes to positive performance, you should be looking for consistency of returns over time and different market cycles. Typically, this might mean looking at funds with a longer performance history of more than five years. If you are looking at a newer fund, you can consider consistency of performance by looking into a fund manager’s track record in managing similar styles of funds.

Chasing performance is more than just an overarching look at fund returns.

Investors can also make the mistake of chasing the best sector winners – it can be a market timing situation that doesn’t play out the following year. Consider, for example, energy was the top performing sector in 2021 and 2022, only to end in the red in 2023 and have smaller positive gains in 2024 and 2025. Technology has been in favour for a few years, but had negative returns in 2022.

If you are going to focus on sector-specific investing, then consider how it fits within your broader strategy rather than trying to chase market returns.

Mistake 5: Falling for Investment Scams

Scammers are becoming increasingly sophisticated in their approach and investors can be lured in by schemes that sound legitimate and solid, but don’t exist.

Some typical red flags are:

• Receiving cold calls spruiking investment advice or products.
• Performance returns that sound too good to be true.
• Pressure tactics.
• Alternative payment methods.

You can avoid this by checking that the business offering the investment is a registered Australian business with an Australian Financial Services License through ASIC.gov.au, and that any person attempting to sell an investment to you is licensed to offer you financial advice.

You can also check the ASIC Banned and Disqualified register, along with visiting the Moneysmart investor alert list. If you think an investment might be a scam, report it to ScamWatch.

Remembering Tried and True Investing Wisdom

At the end of the day, avoiding the biggest mistakes involved in investing in Australian equity funds comes back to the basics.

Ask yourself:

1. Does it fit within my overall strategy and meet my needs, goals, objectives and situation?

2. How does it work alongside other investments in my portfolio and is it complementary or do I risk being under-diversified and overly concentrated?

3. Watch costs and when considering performance, look for consistency over cycles.

4. Consider tax implications, and don’t forget franking credits.

Finally, remember that a fund doesn’t need to be complicated to be right for you. A passive exposure can be just as suitable as an active strategy if it meets your portfolio requirements.

Funds Mentioned

Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.