Mutual funds (MFs) are rated amongst the top investment choices. However, as an investor, it is crucial for you to know about the possible mistakes while investing in MFs. But don’t fret; help is right here. Let Shilpa Shah guide you through the common mistakes you should be avoiding.
Due to lack of sufficient knowledge, the term ‘MF’ scares off some people. But, honestly, it is not as difficult as it appears to be. In fact, mutual funds are considered to be one of the most sought-after and flexible instruments to create a diversified investment portfolio. However, to make the most of your MF investments, you need to avoid these common mistakes.
Lack of financial planning
It has been largely observed that people invest in MFs without a clear goal, which can eventually prove to be a big mistake. In fact, as an investor, you should have a financial plan or a goal and stick to it. After all, it is your hard-earned money and ideally every rupee that you invest should give you a good return. Also these goals need to be specific, time-bound and as accurate as possible. It is important that you decide on the investment horizon or you may actually end up investing in the wrong fund. In such cases, the amount invested may not yield the desired result. For example, equity funds are meant for long-term investments, but some investors lose patience and expect quick returns in two to three years, which is too short a period for equity investments to maximise returns.
Ignoring the MFs investment objectives/strategy
Every MF has an investment objective which specifies how it proposes to manage your investments. But the mistake of overlooking the investment objective may leave your money blocked in a wrong fund; thereby not helping you much in achieving your financial goals. So, to make the right fund choice, you should go through the Offer Document and understand the goals of the specific fund, its expected composition of the underlying portfolio, etc., and invest in a scheme on the basis of your financial goals and risk appetite. Also, if you don’t want to get into such intricate analysis, then get professional help. Financial advisors are well-trained and experienced in such aspects and can hand-hold you in taking an informed decision.
Investing based on mutual funds’ past performance (short-term)
People make the mistake of investing in an MF on the basis of its past performance over a short period of just 6 to 12 months. But the results of such small period are not very indicative and may not always help the investor in creating wealth. However, before selecting an MF scheme, you need to ensure that it has performed consistently over long-term periods and also compare it with similar funds in the market as well as against the industry benchmark. Ideally, you should be looking out for robust funds that have not only shown growth when the market is doing well but also could remains stable in spite of any market slumps. However, you must know that past performance does not necessarily translate into assured returns as market conditions in future may not remain the same.
Missing out on diversification
MFs are inherently flexible instruments, as they provide for diversification across various stocks, industry sectors and asset classes such as debt and equity. However, sometimes investors prefer investing in just one mutual fund or a particular sector or class which may have given excellent returns in the past. Though this sounds like a good strategy, it may backfire, as it exposes them to investment risks in that particular sector or class. So instead of making the mistake of risking everything by putting all your eggs in one basket and incurring losses from a bad investment, you must take this opportunity to select MF schemes to diversify your investments and spread your risks across asset classes, sectors etc. So just in case, even if one of your schemes underperforms, your investments in other schemes will protect you and may even deliver higher returns. However, over-diversification in MF schemes is also not a good idea, as it is difficult to monitor their indicidual performances simultaneously and it may even affect returns in the long-term.
Losing out on patience
MFs require a disciplined and a systematic investments approach. Often investors make the mistake of not giving required time for investments to provide good yields and end up redeeming prematurely. It has been observed that, when the markets are volatile, investors tend to lose patience and deviate from their financial plan, which in turn can affect their wealth creation adversely. It is important to understand that generation of wealth is not an overnight process; it requires a systematic approach and takes time to give the desired output. Also, if you are a new investor, you should not make the mistake of reacting to the market noise. In fact, learn to ignore all the confusing noises about market corrections and re-adjusting the portfolio, etc., as these tips are usually meant for existing investors. The right approach for you to maximise your returns would be to do your research well, be patient, keep a long-term focus and follow a financial road map.
So, now just cautiously avoid these common mistakes and invest in a MF schemes that are perfect for you and start reaping the benefits of good returns. Happy investing!
