Common mistakes to avoid while investing in mutual funds
January 23, 2021 1:32 PM
Every investor, at some point of time, makes a mistake while making investment decisions. Here we take a look at some common mistakes which you need to avoid while investing in mutual funds.
The investment made in the plan does not qualify for any tax benefit under Section 80CCC.
Every investor, at some point of time, makes a mistake while making investment decisions. For many losing money seems like an unfathomable idea. It is distressing to watch profits evaporate during volatile periods. Investing mistakes are valuable lessons learned in investing arena.
The first mistake is to invest without understanding one’s goals. Sadly, in India, most of the investing decisions are purely based upon recommendations of friends and relatives who may not be adept in the analysis of complex financial instruments. A good financial advisor is a must. He understands your goals and recommends investments that compliment 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.
Another mistake is to make ad-hoc investments based on tax-saving criteria. Investing in tax-saving instruments must fit your investment goals. While fixed deposits offer tax benefits, the interest received on them is taxable. This diminishes the returns. If your goal is a few years away, it makes sense to invest in Equity Linked Savings Schemes (ELSS) which have a shorter lock-in period and have delivered above-average returns in the long run.
Investing without budgeting can cost you dearly. Many invest without having a clear direction in the hope of quick rewards. If you do not have a plan, you will be forced to sell your investments at a loss when you require money. It is essential to have an investment plan and stick to it. A part of your savings can be invested in equity and debt funds through a Systematic Investment Plan (SIP). Additionally, the bonus or gifts can be invested in lumpsum. This will help you to accumulate a decent corpus in the long run.
Enthusiasm can be bad for investing. One of the biggest mistake made by investors is to invest in too many funds. Often in the name of diversification people end up buying similar funds which defeat the entire purpose of diversification. For example, large-cap funds have similar investing strategy. Hence, owing a few large-cap funds would yield similar results. Thus also increases the risk for the portfolio. Before investing one must assess his risk profile and invest according to his risk appetite. Also instead of investing in equity or debt, one must invest across various asset classes like equity, debt, commodities, REIT and international funds. This helps to hedge the risk of volatility.
Volatility can be very unnerving for even the most seasoned investors. That is why financial advisors advice to invest in a staggered manner to take advantage of rupee cost averaging. Another advantage of investing through SIP is that it helps the investor to maintain his calm and not resort to panic selling during volatile markets. A seasoned investor knows that bear markets are always followed by bull markets. Hence a well-planned investing strategy can deliver rich dividends if followed diligently.
Finally, investing is not gambling. One of the biggest mistakes is to invest with the mindset of reaping short-term profits. The same applies when people rush to sell their funds when there is a slight profit. Unless the investment goals are achieved, one should not be in a hurry to sell the investments. Remember, mutual funds are instruments of wealth creation that work best in the long term.
As mentioned above, investing is an art. One should not treat it as a DIY thing and seek the advice of a qualified financial planner to chalk out a strategy that will help one achieve one’s goals with minimal risk.