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Common Mutual Fund Mistakes You Should Avoid

  • August 30, 2017
  • rootroot

Mutual funds are an ideal investment option for investors to meet their various financial goals. While there is a growing awareness of mutual funds among retail investors in the country, new investors are often worried about the fluidity and expensive valuations that make up the typical nature of most Mutual Fund investments.

When investing in Mutual Funds, you should be clear about your investment goals and should invest in schemes with a horizon of at least 5-7 years, for maximum returns. Also, you should be mentally prepared to withstand instability in the market. While running away from Mutual Funds is not the best choice either, you should invest wisely and avoid the following mistakes, which many investors tend to make frequently –

Mistake 1 – Treating mutual funds like stocks and churning the portfolio

A large number of investors tend to invest in a large number of funds to diversify risks, without realizing that investing in a large number of funds would mean a greater possibility of picking underperformers, leading to unproductive or sub-optimal results. Furthermore, over the long term, these costs, in the form of exit loads, may add up and have an unfavorable impact on your returns.

Mistake 2 – Not planning the investments

Your financial goals should be an important deciding factor for your investments, if they aren’t already. Many retail investors tend to invest in Mutual Funds on an ad-hoc basis or on the advice of neighbors, friends, and relatives. As a result, they end up buying and selling funds blindly, with wrong financial priorities. Planning is the essence of identifying your needs and financial objectives for the particular stage of life you are in.

Mistake 3 – Looking at recent performance to make predictions

This is one of the worst mistakes one can make while investing their hard earned money. New investors often rush to reserve profits in funds that are doing well currently, fearing that it may go down in value in the future. Mutual funds, essentially being long term investments, have to be thoroughly examined and understood for their performance in the past (5 years or more). By expecting profits in well-performing funds, you are simply giving up on future returns.

Mistake 4 – Getting too greedy

Everyone wants to invest in microcap funds these days, expecting huge returns. However, they forget about the volatility these funds may hold, and make miscalculations that can lead to huge losses. Well performing funds do not stay the same and neither do the underperforming funds; therefore, you should invest only after you’ve taken a close look at the fund and its expected future performance.

Mistake 5 – Running after NFOs without proper research

Mutual Fund companies launching new NFOs when the market performs well is a common practice. These opportunistic funds are not exactly IPOs and may have underlying assets that might not always be new. Also, generally being sector specific, these may focus on certain categories like mid cap and small cap funds, limiting the return diversification. Therefore, it is strictly advised to check the performance of available schemes and invest in NFOs that suit your profile.

Another thing that new investors should keep in mind is that there are no magical formulas that can maximize your returns in Mutual Funds; only investing regularly, albeit a small sum, over a long period can do that. Therefore, if you are a new investor, select suitable funds, invest in a disciplined manner, and if required, bank on a fund manager who can take the responsibility for studying, selecting, and monitoring your investments in lieu of a nominal fee.

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