5 mistakes mutual fund investors should avoid to ensure good returns

By: | Published: August 11, 2016 12:13 PM

Investment in mutual funds is a long-drawn process that takes time, attention to detail, and care

5 mistakes mutual fund investors should avoid to ensure good returns Investment in mutual funds is a long-drawn process that takes time, attention to detail, and care. (Photo: Reuters)

Patience, perseverance, and consistency are the pillars of investment—especially investments in mutual funds. When you pick a fund, you need to give it time in order to grow your money. The growth will not arrive in a day or a week or even a month. You need to remain invested for a sizeable length of time, pass through multiple volatilities in the market, and reach your investment horizon.

Many people perceive mutual fund investment as a one-time activity. And they are wrong here. Investment in mutual funds is a long-drawn process that takes time, attention to detail, and care. At the end of it awaits an attractive growth rate.

There are a wide variety of mutual funds options that allow investors to invest in the equity, debt, bond, commodity, bullion, and money market instruments. Funds are also classified into short, medium, and long term options. Therefore investment requirements of any shape or size can be achieved through mutual funds.

Normally, investors pick a fund on the basis of their risk profile, return expectations, and tenure requirements. It is important to assess these details, else there’s a great chance your capital would get eroded in a market crash.

Let’s check the five of the biggest mistakes investors should avoid committing in order to ascertain good returns.

Picking The Wrong Fund
This is the first—and probably the most critical—step while making an investment decision. Often people don’t know which fund suits their needs, and they invest without due research and analysis. You must know your investment goal, return expectations, and the risk you can take with your capital. Based on those requirements, determine the tenure for which you want to invest in a fund, ascertain whether you want to invest a lump sum, or systematically over a regular interval, and accordingly pick the fund best suited to those requirements. You must analyse the fund’s past performance, expense ratio, current portfolio, and all other parameters for best returns. This is especially important if you’re investing for the long term, since picking the wrong fund would mean missing your target by a long margin.

Application Mistakes
Often people make mistakes by not taking the application process seriously and later on suffer for it. Apart from basic guideline such as filling the application correctly and clearly, providing supporting documents, and mentioning their bank detail correctly, there are some other points investors ignore. It is important to keep a photocopy of the application form. In the future if you want to change details like bank account, nominee, etc. you have to provide the exact information as mentioned during the application. The copy of application also helps you remember the signature in the long term – something people often forget or modify over the years.
Mutual fund companies send an SMS and email confirmation immediately after an investment is registered with them. But investors do not take care of verifying their details with the mutual fund company once their amount has been debited. It is important to check all details and immediately inform the company in case of discrepancies.

Ignoring Risk Mitigation Techniques
Never put all your eggs in one basket. That’s one of the oldest, most time-tested investment advices you’ll get. Mitigate your risks through diversification. Understand the distinction between an SIP and lump-sum investments. Understand the need to look beyond funds that are performing well now. If you fall in love with one fund and invest all your money in it, you are increasing your risks. The timing of investment is also important.

For example, if you have four equity mutual fund SIPs, you may want to spread their dates over the month. Invest in one fund every week of the month. This would help in better averaging of the market volatility in the long run.

Setting Unrealistic Targets
Chasing unrealistic return targets is a very common mistake by investors. Instead of waiting for your existing investments to provide phenomenal returns, it is wiser to expect an average return and continue with your planned investment process. It is always difficult to achieve a return of 50% or 100% per annum than the 15% or 20% that some funds may provide. Setting realistic targets could help in determining any extra investments required to achieve your goals. Nevertheless, if you do achieve a phenomenal return, take it as a reward for your patience. But don’t go in with unrealistic expectations, since trying to achieve them would mean taking bigger risks and potentially spoiling your portfolio.

Unsystematic Profit Booking
Profit booking is as important as making an investment. Investors sometimes make unplanned bookings. At other times, they don’t book profit at all, despite achieving their targets. Such practices should be avoided. It is sensible to book profits when your targets have been achieved. You can of course review and reset your targets based on ground realities. If your target is to make Rs. 1 lakh in 5 years and if you achieve the same in three years, then think seriously for a systematic redemption rather than exiting hastily or not booking the profit at all.

It’s important to avoid these mistakes, but it is also important to keep investing strictly towards your financial targets and retirement goals. Do not hesitate to consult your investment advisor or planner at regular intervals to ascertain the right time to make an investment and also when you want to book the profit.

The author is CEO, BankBazaar.com

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