Mistakes To Avoid While Investing In Mutual Funds

Mistakes To Avoid While Investing In Mutual Funds

Janet Jackson has a memorable quote that states, “In complete darkness we are all the same, it is only our knowledge and wisdom that separates us, don’t let your eyes deceive you”

It is becoming increasingly common for us to be lured into investing in stocks, mutual funds with expert comments and promises of unrealistic returns through print media and other social media. You’ll always have a mix of contradictory opinions and suggestions going on at once. It is better to have your relevant research to form your own decision based on the information you will gather from all the experts.

The investment world is always full of theories as common investors want to make a fortune overnight. Constantly you are showered with so called foolproof theories or rapid strategies by your friends, and relatives who are self-proclaimed experts. One day you will hear that there is no future for large cap stocks, so this is the right time to get out of the Large Cap based Mutual Fund and put your money to Mid Cap or Small Cap which will have a great run soon. The very next day, another expert will say that the run of Mid cap or Small Cap will start only after 3 years. What will be your action? If you are going to believe all the noise from the street, you will have to buy or sell mutual fund schemes every other day without any clue about your mutual fund portfolio.

Mutual Fund Investment Mistake 1: Depending on Tips From Unregistered Finfluencers and Using Them In Your Personal Journey

A Mutual Fund is a pool of investors’ money, invested in a portfolio of securities as per the stated investment objective. Unlike Stocks, you should not use a Mutual Fund scheme for trading purposes. Your Mutual Fund investment should be mapped with an investment goal and you should stick to your investment with periodic reviews till you achieve your goal.

Mutual Fund Investment Mistake 2: Investment Influenced By Street Noise and Gut Feeling Instead of Due Diligence

We often take inordinately high risk without considering our risk-taking abilities. The proportion of your net worth exposed to different kinds of Mutual Fund Schemes should be based on your risk profile, which changes with age, liabilities, and time frame/ goal of your investment. You may not opt for aggressive equity funds for the highest potential return if your risk-taking ability is Moderate or Conservative.

Before making an investment decision in a Mutual Fund scheme, either you have to assess your own risk profile and Goal of investment, go through all the relevant documents, make a peer group comparison or you have to consult with an expert registered with SEBI, who has good credentials, sound domain knowledge, experience and integrity. When we are taking legal advice from an Advocate, or health advice from a medical practitioner, why not consult a SEBI registered financial advisor at the time of investment? Only a SEBI registered Financial Advisor with sound knowledge and expertise can help you achieve your financial goals by identifying the right Mutual Fund Schemes according to your risk appetite and the time frame (Goal) of your investment.

Mutual Fund Investment Mistake 3: Lower the NAV Better the scheme:

As per Warren Buffet “Price is what you pay, value is what you get.”

Sometimes, investors run after the NFOs of the Mutual Fund because the NAV is Rs.10/- only. It is not important at what price you are getting units; it is important to know at what price the Fund Manager can buy the underlying securities to build the portfolio. I am not discouraging investors from investing in NFOs. However, it is advisable to invest in NFO only when it comes with a unique idea, which no other existing Mutual Fund schemes offer.

Mutual Fund Investment Mistake 4: Comparing the wrong Funds

Compare the returns with the right peers and with the right benchmark index. Don’t compare the performance of a Small Cap fund with a Large Cap fund following different indexes. While comparing the funds in the same peer group, please check the Expense Ratio, Alpha, Beta, Sharpe, Fund Manager and management team, performance history, and the AUM.

Mistake 5: Judging a scheme based on Past Performance only

The Statutory Message of any Mutual Fund Scheme is “Past performance of a Mutual Fund scheme does not guarantee the future returns.”

Your investment decision should not be based only on the Past Performance of the scheme. A change of market dynamics, economic policy of the Government or change of Management of the AMC may adversely affect the Performance of the Scheme. Investors must periodically assess the Mutual Fund scheme performance and adjust their portfolio as necessary.

Mutual Fund Investment Mistake 6: Redeeming Too Early or Stopping SIPs

All of your investments should be mapped with a goal. Investment in Mutual funds is not like investment in Stocks. Pressing the panic button without thinking deeply will not only affect your investment goal, it will also affect your Financial Freedom. Through SIP investment in a Mutual Fund scheme as per your goal, you will get the advantage of Rupee Cost Averaging, Power of Compounding, Disciplined Savings, and many others. The market has always rewarded those investors who have remained patient with their investments and stuck to their investment goals.

Mutual Fund Investment Mistake 7: Overlapping

We invest in Mutual Funds to minimize our risk with the help of diversification. If we invest in too many Mutual Fund schemes with the same investment objectives there is a chance of overlapping of the stocks in the portfolio and thus, we may fail to mitigate the advantage of diversification.

Happy Investing

If you have a question, share it in the comments below or DM us or call us – +91 9051052222. We’ll be happy to answer it.

~ Suman Dan

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