Mistakes to avoid while investing in mutual funds
Investors must have a financial goal and time horizon when investing in mutual funds.
An investor can reap good returns in mutual funds only if they invest for the long-term.
Mutual funds are gaining more and more popularity nowadays owing to the returns that it offers and ease of investment. The best advantage of choosing this financial instrument is that it is suitable for all types of investors. Whether you are looking for a small, medium, or large amount to invest, you can invest in this instrument through a Systematic Investment Plan (SIP) with any amount ranging from Rs.500 regularly. Besides, mutual funds offer different options like equity funds, debt funds, and balanced funds. You can choose any of them or a portfolio of different funds to invest your money. However, you need to avoid some mistakes to be good mutual fund investors to generate good returns. Take a look at the mistakes that you need to avoid while investing in this financial instrument.
1. Investing without any financial plan or goal
If you are planning to invest in a mutual fund or any other financial instrument, the first thing you need to do is to make a financial plan. In India, most people choose financial instruments based on the advice of their friends, family or colleagues. In fact, they invest without any financial plan. They make wrong investment decisions and ultimately result in monetary loss. Investors must have a financial goal and time horizon when investing in mutual funds. Investing in without proper goal is like you are travelling without any destination. Those who invest their money ignoring their financial goal will end up investing in instruments that do not suit their needs. As an investor, you need to make a financial goal and allocate your assets based on that.
2. Investment without budget
Even if you have a good financial plan for investing your money, you must have an idea about the budget. Without a proper budget, you may not afford to invest in a mutual fund scheme regularly. It can make a hole in your pocket and stop or discontinue invest in SIP. So, take into account your monthly income and expenses first. Then you prepare a detailed investment plan before investing in a mutual fund.
3. Investing in too many schemes
In order to diversify the risk, investors tend to invest in too many funds. Many new investors do not know that each mutual fund is designed to diversify the risk. So, your fund manager invests your money in different securities like binds, stocks and money market instruments. So, there is no need to invest in many mutual funds for diversification.
4. Invest without paying attention to the risk profile
Many investors consider only the return part when they decide to invest in mutual funds. They usually invest huge amount without assessing the risk associated with it. For example, risk-averse people should better avoid investing in equity funds because of its volatile nature. Such investors need to invest in debt funds to generate returns. They will also consider the investment horizon. If they do not require the fund within 5 years or more, equity funds are suitable for them. For people who look for short-term investment can park their money in debt funds.
5. A short-term approach for investment
An investor can reap good returns in mutual funds only if they invest for the long-term. Mutual funds are long-term financial instruments and you need to keep invested for a longer period in order to enjoy its maximum advantages. You cannot reap good returns by investing your money for a short-term. People often book profit on funds thinking of more returns. But it will deprive them from future gains.
6. Not giving consideration to debt funds
People think that mutual funds invests only in equities, but a good fund manager invest their customers money in both equity and debt funds. Since debt funds invest in fixed income securities, it can help investors to earn interest.
7. Not monitoring your funds
You can choose the best mutual funds to invest your money with the hope that they perform well. But the funds that you choose may underperform at times. You can get to know about this only if you monitor your funds regularly. Once you realize that your funds not perform well, you can replace them with better options. Investors need to monitor the performance of their funds at least once in a while.
8. Take too much time to start investing
Many people hesitant to take the first step for start investing in mutual funds. They may not have sufficient funds to invest or if they have funds they are lazy to start investing. But people can start investing even with as little amount as Rs.500/-. Even investing in small amounts can generate good returns over time because of the power of compounding. By starting early, you can enjoy more benefits.
9. Invest all money at one go
Investors, especially novice investors, often invest all their investment in mutual funds at one go. They may not have sufficient money to meet during emergencies. Immediate redemption of funds may take a couple of days. Besides, you have to pay the exit load as well. So, instead of paying a lump sum amount, invest in mutual funds through SIP to get maximum returns.
10. Stopping the SIPs
You can get the best returns by investing in mutual funds regularly through SIP. But many people have the concept that they can achieve higher returns if buy mutual fund units at low prices. If you stop your SIP, you can invest only a small amount. For getting Rupee cost averaging over time, you keep investing in mutual funds through SIP regularly.
11. Wrong asset allocation
Many investors go wrong when it comes to asset allocation. When it comes to asset allocation, many people consider their financial goals and time needed to reach that goal and risk appetite. They forget that a portfolio requires to be diversified across different asset classes.
Investing in mutual funds certainly helps you to generate good returns. But it is necessary to avoid some pitfalls to get maximum returns and avoid financial loss. You can make good returns by investing in mutual funds if you avoid the above mistakes.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.