Avoid these 7 mistakes while investing in mutual funds
If you have not invested in a mutual fund scheme till date, you are not trendy for sure. The monthly systematic investment plan (SIP) book of MFs have swollen to Rs 7,300 crore, underlining the preference of Indian investors in volatile financial markets. The idea behind most investments is wealth creation over a long period of time.
However, not many make it to the wealthy end. There are several reasons behind the not so happy ending. While markets remain volatile and do not care about your investments, your own actions sometimes are detrimental to your dreams. Here is a list of mistakes MF investors must avoid to ensure one makes money by investing in mutual fund schemes.
(1) Ignoring your financial goals
This should be the worst thing you can do while investing. Never forget that you are investing because you have to achieve your financial goals. Investing without a goal is akin to travelling without a destination.
If you ignore your financial goals, you will end up investing in avenues that do not suit your needs. For example, if you have to accumulate Rs 1 lakh to pay for your child’s fees next year, it makes sense to start investing in a recurring deposit every month or put that money in a fixed deposits maturing at a time when you need it. But if you invest that money in an equity mutual fund, the market may give you a rude shock.
The same holds true for long term investments such as retirement. “Never invest that money in a dividend option of a MF. It does not let the money compound as many times investors forget to reinvest dividend income. Introduction of dividend distribution tax on equity funds further eats into your returns. It is recommended to invest in growth options of schemes if you are saving for long term financial goals.
(2) Trying to time the market over time in the market
While the SIP book is growing there is no dearth of investors who prefer to stand at the other extreme. These are these investors who prefer to time their investments to maximise their returns. Some even prefer to sell their investments when the markets appear overpriced. However, it does not work for most of them barring a few lucky folks. Some keep waiting for the markets to correct while others repent as to why they sold at the previous top.
Instead, it makes sense to keep investing at regular interval and let your money grow over a long period of time. Invest in equity fund through SIPs and hold your investments for the long term. This will help you overcome timing risk.
(3) Chasing high returns
For many first time investors, the best way to choose MF schemes is to sort them based on their historical returns. However, it may not be the best way to do so. For example, if you have tried picking a debt fund in December 2016 on the basis of past returns, you would have definitely picked up a long-term gilt fund. Over the next 12 to 15 months, you would have burnt your fingers thanks to two factors: 1) Past returns were an outcome of falling interest rates; and 2) Interest rates rose in 2017 and 2018. One need to understand how mutual fund schemes work and not just rely on past numbers.
(4) Investing in too many schemes
This is one of the most common mistakes investor commit thinking that they are diversifying. They tend to forget that each MF scheme has a diversified portfolio of securities. More schemes you buy, more difficult it becomes to keep a track of them. Instead build a portfolio of 2 or 3 well managed schemes and keep adding to your investments.
(5) Ignoring risk profile and asset allocation
This is pertinent in heady markets. Investors get carried away and suffer from the fear of missing out. “In a bull market, investors with moderate risk taking ability come under peer pressure, ignore their risk profile and invest in risky avenues such as equity funds. The bull markets further skews the balance in favour of equities. This situation may lead to big losses in case the markets take a U-turn, especially when investors opt for smallcap and midcap focused schemes, as quick falls can evaporate gains earned over months and years.
Stick to your risk profile. Instead of going with the crowd, it makes sense to strictly adhere to one’s asset allocation.
(6) Investing all your money at one go
Investing large sums in equity MFs is a tricky game. Not many investors can handle the situation emotionally. The best way to avoid it is to write all cheques and sign all the forms in one go or click wherever required at one go. However, this is not the best method. You are exposing yourself to timing risk. It makes sense to take a staggered approach to investing. Systematic transfer plan helps you to invest at regular intervals and optimise your returns.
(7) Not reviewing
Mutual funds are vehicles to invest in various asset classes such as gold, equity and bonds. Each fund manager has his way of making money for his investors and is governed by the scheme’s objective. The investors are expected to keep a track of his scheme’s performance from time to time. It makes sense to conduct a periodical review of all your MF schemes and weed out underperformers, if any. Failing to review can cost you a fortune.
“It is difficult to earn money but it is even more challenging to manage it”
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