Mutual Fund: 5 mistakes you should avoid while investing in mutual funds

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Published: January 27, 2020 6:27:47 PM

This is one of the most common mistakes investors make, in the name of diversifying. Note that it is important to diversify a portfolio while investing in MFs, however, adding too many schemes to a portfolio just increases the burden of tracking them.

mutual funds, Mutual Fund Investment, mistakes to avoid in mutual fund, mf, index funds vs large cap funds, mutual fund sahi hai, index funds, large cap funds, Nifty50In mutual funds, depending on the investor’s risk appetite, investment horizons, and personal financial goals, he/she can choose from a plethora of funds.

According to industry data, it is seen that more and more investors have been opting to park their money in mutual funds. Other than choosing traditional products investors are putting their money in MF as it gives them the opportunity to earn more through the power of compounding over a period of time.

There are various advantages to investing in mutual funds. For instance, one gets to diversify their portfolio and divide their assets between debt and equity funds. Also, depending on the investor’s risk appetite, investment horizons, and personal financial goals, he/she can choose from a plethora of funds.

Additionally, MF offers flexibility, wherein investors can make either a lump-sum investment or put in small amounts over some time through a SIP. Investors also benefit from the high level of liquidity that mutual funds offer, (open-ended mutual funds), wherein investors can buy and sell their units at any time.

Though investing in mutual funds is rising, most people don’t know what are they doing wrong while and after investing.

Here are some of the common mistakes made by investors, that should be avoided while investing in MFs;

Choosing many schemes to get the most benefit

That is not how it works. This is one of the most common mistakes investors make, in the name of diversifying. Note that it is important to diversify a portfolio while investing in MFs, however, adding too many schemes to a portfolio just increases the burden of tracking them.

What should be done: Preferably, investors should choose only a few schemes that offer exposure to the overall market. With two or three well-managed schemes, a good portfolio can be built, which will also be easy to keep track of.

Trying to time the market

Just to yield more investors make the mistake of trying to time the market while investing in MF. Without the proper knowledge, many investors even sell their investments when the markets are high to maximize the returns but only a few turn out to be lucky.

What should be done: The proper approach to investing in mutual funds is at regular intervals, which helps the money grow over the tenure of the investment. Investors can start with investing in SIP (Systematic Investment Planning), which not only helps the money to grow but also helps investors invest in a disciplined manner.

Focus on asset allocation

To get the most out of one asset, many investors put all their money into one type of fund. Asset allocation is proportioning an individual’s investment in various assets, is the way to invest in mutual funds. Investing in mutual funds will become a tricky game if an investor invests all his/her money in one place.

What should be done: While allocating your asset, the primary determinants should be your financial goals, tenure, and your risk appetite. While investing try to diversify your portfolio adequately across asset classes such as fixed income, equity, gold, and real estate among others.

Not reviewing your portfolio

Not reviewing your portfolio on a regular basis can bring home losses for you, and most of us fail to do so. Some investments do not deliver what they promise and, hence, it needs to be checked regularly to get rid of such investments.

What should be done: Preferably, investors should track the performance of their investments at a regular interval. Additionally, investors should try to conduct a periodical review of all his/her mutual fund schemes, to avoid obstacles in his/her wealth creation, in the long run. This way underperforming assets can be excluded.

Ignoring risk profile

Generally seen, most investors are driven by the fear of missing out. Solely for that reason, even in a bull market, investors ignore their risk profile and coming under peer pressure to invest in risky avenues.

What should be done: If one is saving for a goal, he/she should stick to their risk profile. Experts suggest one should not follow the crowd, and stick to one’s asset allocation.

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