Common Mutual Fund Mistakes to Avoid
Investors need to educate themselves about the pros and cons of investing in any type of financial instrument including mutual funds in India. This will help them avoid some common mistakes that can restrict their returns or result in losses.
Here are some common mistakes made by investors:
- Not Defining Financial Goals – The most common mistake that investors make is to invest randomly without linking their decision to any goals. What is recommended is to set goals and their time frames and then invest accordingly to fulfil them.
- Investing Without Setting a Budget – This mistake can prove to be very costly. Investing a big amount in the hope of some quick rewards can backfire and result in hefty losses. This mistake can be avoided by making an investment plan and setting a budget. Investors can choose to invest in a variety of instruments through mutual funds.
- Setting Unrealistic Expectations – Investing to achieve high returns in a short time is a common mistake made by many investors. What should be considered is the long-term trend in the market rather than getting attracted by short-term fluctuations. This helps investors’ set realistic goals and prevent unnecessary disappointment.
- Investing Without Assessing the Risk Involved – All investments carry a certain amount of risk and it is good to assess that risk. Investing without any kind of research or investing in similar products can enhance the risk of investor portfolio so one should go for mutual funds that invest in various asset classes including equity, debts, commodities, or REIT. Risk-averse investors should go in for investment in liquid funds or funds that invest less in shares and more in fixed income instruments.
- Investing All Your Funds at One Point in Time – A common mistake made by many investors is to invest all their funds at the same time. Financial experts recommend investing in a phased manner to take the advantage of averaging.
- Investing to Earn High Profits in the Short-Term – Investors need to realise that investing is not gambling. Mutual funds are financial instruments that offer good returns over the long run and so should be held for a longer duration or till the time their investment goals are achieved.
- Focusing Only on Past Performance of a Fund – Past performance of a fund is not reflective of its future. But many investors invest based on previous returns generated by a mutual fund. Instead of this, they need to base their investment decisions keeping in mind their goals and risk appetite besides researching about the working of the fund.
- Investing in Similar Types of Funds – Many a times, investors park their funds in different funds that fall in the same category. This is called inefficient diversification.
Investors planning to invest in mutual funds in India should make informed decisions by studying a scheme’s details and matching it with their goals and risk profile. Regular monitoring of a fund’s performance is also essential to prevent any drastic changes in the valuation of your investme
