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Avoid common mistakes while investing in mutual funds

Avoid common mistakes while investing in mutual funds

Last Updated : June 10, 2016, 9:43 a.m.

Mutual funds are now increasingly gaining the acceptance of different investors in India owing to the ease and return that they offer. This financial instrument is suitable to all types of investors ranging from small, medium or large as you can invest in mutual funds through Systematic Investment Plan (SIP) with amount ranging from Rs 500 to infinite on a monthly, quarterly or annual basis. Also, you have the option to choose from equity funds, debt funds and balanced funds, which invest in equity, debt and in both equity and debt, respectively. The gain from these investments can be significantly higher. However, if you commit mistakes knowingly or unknowingly, you can be in choppy waters. Here are some of the mistakes that you need to avoid while investing in mutual funds.

Investment without financial goals
Investment in any instrument be it stocks or mutual funds must be made in accordance with the financial goals you need to achieve. But, most of the retail investors in India are guided by their relatives and friends and not by the financial goals, ending up making wrong investment decisions and as a result face monetary loss. So, make sure you make a goal and allocate your finances accordingly. Suppose you want to create a fund for the higher education of your child, you can start with SIPs of different funds to accumulate a large pool of wealth, which would be required 20-25 years later from the time your child takes birth. However, make sure you pick funds based on their past and eget more returns.xisting performance to stay on the safer side. If your retirement time is say 5-6 years away, then you must look to invest in balanced funds.

The common mistake that people generally make is ad hoc investment based on tax-saving criteria. Most of the people invest in Equity Linked Saving Scheme (ELSS) as it qualifies for tax exemption with a short lock-in period of 3 years. Yes, you can save taxes but investing lump sum in ELSS can expose your money to varied market risks and thus deprive you from the benefits of rupee-cost averaging, a common feature of mutual fund investment. Tax saving aspect must align with your investment objectives, which would then be driven by the financial goals.

Investment without budget
Avoid the mistake of investing in mutual funds without having an idea of the budget that you can afford. Investing without budget can make a deep hole in your pocket and thus worsen your financial life. Make sure you prepare a detailed plan on mutual fund investment after taking into account the monthly income and spending. You can judiciously use the the annual bonus or gifts, if any, in addition to the monthly salary in mutual funds.

Savings can differ based on the earning and spending style of people, with some finding hard to save even 10% while others managing to save around 50% of their income. So, assess the saving level that you can be comfortable with and make investments accordingly.

Not paying attention to risk profile
Often people get swayed by the returns on mutual fund and make a huge investment on it without actually assessing their risk profile. Suppose you are risk-averse, then you can better avoid investing in equity funds as they are volatile in nature. Risk-averse investors can put their money in debt funds and reap the benefits. Also, one must know when will they require the fund. Suppose you don’t require within 5 years, then you can choose the equity fund option. But, if you require within the said period, then debt funds can be where you can park your money.

Investing in too many funds
It is observed that investors invest in too many funds to diversify the risk. But, they fail to decipher the fact that an individual fund is designed to diversify the risk by investing in various securities such as stocks, bonds and money market instruments. By parking money in a large number of mutual funds, you don’t necessarily diversify the risk. If you want to diversify the risk due to below par performance of a particular fund, then you better divide your investments in few funds. Picking large number of funds enhances the possibility of a large number of under performing funds in your mutual fund portfolio, which could lead to poor returns. Also, with large number of funds, multiple SIPs will be deducted on different dates of the month. So, it is possible that you may not have sufficient balance in your bank account for the payment towards SIPs on particular dates. You can manage the payment of SIPs seamlessly if you pick few funds.

Selling investments in bear market
The continuous downfall of the market can make you jittery as an investor. On the backdrop of such bearish trend, you would be tempted to redeem your mutual fund investments. But, you must remain calm and don’t press the panic button. Always keep in mind your goals and don’t get overly concerned and overjoyed by bearish and bullish trend of the markets. Every bear trend is followed by the bull, resulting in the recovery of market from the lows as well as helping it scale a new peak.

Not paying due consideration to debt funds
Most of the Indian retail investors carry the wrong notion that mutual funds invest only in equities. But the fact is that mutual funds invest in both equity and debt in good measure. Debt funds invest in fixed income securities that gives you the chance to earn interest. Fixed income securities like NSC, fixed deposits, corporate bonds, etc can offer a stable flow of income.

Investing with a short-term approach
Don’t go with a short-term approach with regards to mutual fund investment as you may not reap much benefits. People often commit the mistake of booking profit on funds offering more returns. Doing this will deprive you from future gains that can be quite significant to your cause. Mutual funds are long-term investments and thus you must stay invested for a longer period of time to extract maximum advantage.

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