5 Mistakes that can Cost Dearly while Making Mutual Fund Investment

by Raghav M. Marketing

The rising awareness about the importance of investment, stock market nearing its peak, and fantastic marketing by the industry has made mutual funds a go-to option for investors. As compared to other asset classes, mutual funds at least look simpler and have great potential to achieve your financial goals.

But be it greed or simply lulling into complacency, many investors, especially who are new to mutual funds, end up making costly mistakes. If you are planning to invest in mutual funds, make sure that you avoid the 5 mistakes mentioned below.

1.       Selecting Balanced Funds just for the Regular Dividends

Balanced mutual funds offer a dynamic combination of safety through debt investment and great upside potential through equity investment. However, in the past couple of years, they are being pushed as a way to earn regular dividends. Many of the funds that used to offer annual dividends now offer them on quarterly or even monthly basis.

Investors should know that the dividends are nothing but the accumulated surplus in the fund. No scheme guarantees that they’d be able to maintain the same dividend distribution quantum in future. When the stock market falls, there won’t be enough surplus with the fund house to give regular dividends.

2.       Timing the Market

This is a common mistake mostly committed by people who have some experience of the stock market. They wait for the market to correct before they invest a lump sum amount or start a SIP in a mutual fund. While this theory might theoretically work, it is almost impossible for even an experienced investor to time to market correctly.

Understand that mutual funds are long-term investments. Rather than focusing on where the market is, it is better to understand your investment objectives and invest based on the objectives. You might end up losing some great opportunities if you simply wait for the market to correct.

3.       Redeeming Units when the Market Starts to Fall

It is very natural to panic when the market starts to crash, and you see your portfolio falling in value every day. Many investors end up redeeming their units when something like this happens. But it is also important to know that equity markets are cyclical. A bear market will be followed by a bull market and a lot of times the following bull market reaches newer heights than before.

With the economy of India improving consistently, such bear phases should not result in any panic among mutual fund investors. As long as you know, you’ve selected a good fund and understand your goals, just sit tight and the market would recover sooner or later. In fact, a lot of experienced investors invest more when the markets fall to take advantage of the next bull phase.

4.       Investing in Several Funds to Diversify

The term ‘diversification’ is now used so loosely that it has started to lose its meaning. Know that mutual funds in themselves are diversified. If you select an equity fund, your money would already be invested in several companies from different industrial sectors.

A lot of investors end up investing in several funds to achieve diversification. While there is no denying that diversification is important, limit your investments to just a few funds. Several funds would not only make it difficult for you to track them but there is also a major possibility that you’ll pick a lot of underperformers which wouldn’t happen if you only select a few good funds.

5.       Tracking the Portfolio on a Daily Basis

While the online availability of your portfolio is a great advantage, a lot of investors end up misusing this benefit by tracking their portfolio on a daily basis. Know that your psychology plays a very important role when it comes to any kind of investment, including mutual fund investment. Monitoring the performance of your investment on a daily basis would not serve any other purpose than increasing stress and fear.

When the market starts to fall, daily monitoring could encourage you to take wrong decisions. Markets inherently move up and down. You just remember that you’ll remain invested for a long time and such daily movements won’t affect the overall returns on your investments.

No matter what kind of investor you are or what your objective is, there is now a mutual fund for everyone. Avoid the mistakes mentioned above, and you are sure to become a wiser and smarter investor.

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Created on Apr 30th 2018 05:18. Viewed 755 times.

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