8 Mistakes To Avoid While Investing In Mutual Funds
By Akhil Chugh
Date July 14, 2024
“Try to learn from your mistakes – better yet, learn from the mistakes of others!” – Warren Buffet
Most investors are smart people showcasing excellent financial knowledge and expertise when it comes to saving money.
But, when it comes to investing, they act in a different manner. They make irrational decisions like making investments based on hearsay or gut feeling, making investments in haste for year-end tax saving, on friend’s advice, hot news or just to test the waters.
These decisions not only lead to erosion of wealth, but they also infuse a sense of disbelief and mistrust with investing, leading to staying off from investing for an indefinite period.
With so much on the line and a stake in investing, investors cannot afford to go out blindfolded into investing world. A person who only started to learn driving yesterday can’t just become Michael Schumacher tomorrow, right?
The problem is not making mistakes, because mistakes are a part-and-parcel of our life. As an investor, we should be able to understand what the mistakes were, why we made them, when we tend to make them and how to avoid them.
To help you navigate the investment landscape, here are eight common mistakes to avoid while investing in mutual funds.
8 mistakes to avoid while investing in Mutual Funds:
All of us make mistakes. But, some of us have trouble accepting that we have made one. Only when you can accept and learn from these common mistakes, then can you triumph in your investment journey. Learning from your own mistakes is good. It’s even better to learn from the mistakes made by other investors.
1. Investing 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 the recommendations from 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.
Having a goal-based investment can help you decide your risk appetite and investment horizon to achieve a pre-defined goal. This process will help give a clear direction to your investments.
Taking assistance from an experienced finance professional is a must. He understands your goals and recommends investments that complement your goals. For example, if you are saving to fund your children’s education and if you have 7-8 years, you can consider building a diversified equity fund portfolio instead of parking your money in debt funds or a fixed deposit.
2. Timing the market:
‘Timing the market’ means buying at lows and selling at highs. Though it appears simple, it is very difficult to implement in the real-world given uncertainty in the market.
As an investor, you might feel that the market is overpriced when it is not. Or you might predict a market crash. However, the fact is that the future is always uncertain. And no wolf of wall street was ever successful in correctly predicting the market.
So don’t put your efforts into trying to figure the right time to invest or withdraw your funds; rather stick to the plan which you drafted and religiously follow it. Have a disciplined investment strategy, like investing in mutual funds via SIPs.
SIP is an instrument that takes the advantage of market highs and lows. The biggest advantage of investing with SIP is that it remains unaffected by your emotions. It also allows investors to follow an investment timeline with systematic and timely investment. It also inculcates investment discipline in investors.
When markets fall investors get more units and when the market rises the number of units purchased gets reduced, thereby helping to average out the investing cost making timing the market irrelevant.
3. Undermining your risk appetite:
Each one of us can take risks depending on our personal financial situation. Don’t take more risk than you can manage; at the same time, don’t shy away from risk. Both of these actions lead to disappointment.
Understanding how much risk you could take; helps you plan your path better and choose routes accordingly. For example, if you are a low-risk investor then midcap or smallcap funds will not suit you. They might generate higher returns, but they will also carry very high risks. Hybrid funds / Debt funds are more suitable for you.
Before investing in any mutual fund, you should always access your risk tolerance to match your risk profile with the fund’s risk profile. Use the fund’s riskometer to understand the fund’s risk profile.
To know your risk profile, download our mutual fund app & answer few basic questions!
4. Investing in too many or too few funds:
If there is one phrase that all investors should always remember no matter where they are in their investment journey it is that ‘Putting All Your Eggs in One Basket’ is harmful. In the investing world, this saying is like one of the Ten Commandments. It simply means that you should avoid putting all your money in a single basket because this makes you overexposed to risks. For instance, consider the situation where an investor has dumped all his/her savings in high-risk equity funds. Now if the markets enter a slippery slope, the chances of losses will amplify and the investor may even end up suffering significant losses. Now had the investments would have been spread across different asset classes, the non-equity component of the portfolio would have acted as a shock absorber and diminished the impact. Thus, diversification is essential to reduce portfolio risk.
Alternately, there are many investors who tend to over diversify their portfolio and even that can be a recipe for disaster. Managing too many funds and related SIPs and keeping a tab on the performances of all funds can prove to be a nightmare and you may end up having funds in your portfolio that may not be suitable for your goals and your risk appetite.
5. Frequent reshuffling of the portfolio:
Following the herd is something very common in the investment world. By looking at the returns or a promising headline, makes a lot of investors sway towards doing the same thing. Many investors make the mistake of falling into this trap too often. Based on the predictions based on headlines and by following the herd, they try to reshuffle their investment portfolio too often, attracting exit loads, which eventually eat into your overall returns.
Frequent churning of the portfolio also hampers the growth potential of investments. This is because some funds, like equity funds, perform well only in the long run. Frequent churning would make you lose out on time and bring you back to where you started. So, it will take you more time to realize your goals, and also, you will miss out on various opportunities that happened during the time frame.
6. Overlooking tax implications
Ignoring the tax implications of mutual fund investments can lead to unexpected tax liabilities and reduce your overall returns. It is always recommended to understand the tax treatment of different types of mutual funds. For instance, equity funds held for more than one year qualify for long-term capital gains tax, usually lower than short-term rates. Similarly, gains from debt funds with an equity exposure of 35% or less are considered short-term capital gains and are added to your taxable income, taxed at your slab rate. . However, debt funds with more than 35% equity exposure and a holding period of over 3 years qualify for indexation benefits. Plan your investments with tax efficiency in mind.
7. Not reviewing investments periodically:
Just making a mutual fund investment is not enough, its performance should also be reviewed periodically. It is always recommended to review the investments at regular intervals to take timely decisions regarding increasing the investment or exiting it. Not doing so is a common investment mistake observed among investors. Investors often forget or act lazy in doing such reviews and fall prey to market crashes, incurring heavy losses. Thus, the regular review helps an investor to take timely investment action like replacing poor-performing funds with better quality funds.
8. Lack of research:
There are hundreds of schemes available in the market. Before choosing any mutual fund to attain your financial goals, it is imperative to do research about the fund.
For example, it may not be a good idea to go by the ranking of a mutual fund scheme before deciding to invest in it. Investment is for the future, while the rating is based on past performance. It is important to know their expense ratio, asset size, the company and the fund manager, as well as their past performance. If you can do it on your own, by all means, do it. If you feel the need for a professional assistance from financial professional, go for it. We, at Net Brokers, with our strong research team can give you the edge in terms of selecting schemes suitable for you.
Net Brokers Takeaways:
- Goal-based investing helps you define the risks you can take and goals act as the signpost to stay disciplined and on track with your investments. To understand more about goal-based investing, click here.
- Gather all the information and research to ensure that the fund is right for you before you start investing. Getting carried away by the buzz in the market can prove to be a costly mistake in the long run.
- Many investors tend to over-diversify their portfolios, which can also lead to problems. Managing too many funds and tracking the performance of all of them can become overwhelming and counterproductive.
- Do consider the impact of inflation on the returns of your fund because parking your money in an investment that is not able to beat inflation defeats the purpose of investing.
- Regular reviewing with the right asset allocation can help you reach your financial goals sooner.
Investing is an art. One should not treat it as a DIY thing and seek the advice of a qualified financial professional to chalk out a strategy that will help one achieve one’s goals with minimal risk.
Get in touch with us today for assistance!
Download our mutual fund app & get started with your investment journey.
Happy investing.