7 biggest mutual fund mistakes to avoid
Last Updated on June 22, 2021 by Chitale CFS Pvt Ltd
Most common mutual fund mistakes have been the main culprit which keep stopping people from investing in mutual funds. But you need to understand that mutual fund investment has become a hot topic for investors since last couple of years due to the returns it keeps delivering as well as due to the ease of investing and redemption.
Based on recent mutual fund industry data, more and more investors are opting for mutual fund investments. As compared to other conventional investment instruments like fixed deposits, recurring deposits, post office investments, mutual fund is providing opportunity to earn comparatively more due to the magic of power of compounding.
Why to invest in mutual funds?
Mutual funds also provide enormous flexibility in terms of investment tenure, diversification etc. Apart from that mutual funds also offer various investment plans like Systematic investment plan (SIP) in which an investor can invest money regularly in a disciplined manner, Systematic transfer plan (STP) where investor can take advantage of both equity as well as debt markets and Systematic withdrawal plan (SWP) where an investor can make a lump sum investment and can withdraw the profits in regular intervals.
Mutual funds are the best investment option due to the flexibility, returns, diversification and many more such benefits it offers. However one has to be very careful while investing in mutual funds and avoid common mutual fund mistakes while investing in mutual funds.
What are the most common mutual fund mistakes?
Investing in mutual fund is very simple! Investor can enjoy amazing returns from mutual funds if he or she remains committed and disciplined toward investment goals. One can make the best use of his or her savings or income by investing in mutual funds. But an investor has to be careful while choosing proper mutual funds that are in line with his or her investment goals. Small blunders in choosing a mutual fund may cost a lot. Here is a list of common mutual fund investment mistakes that an investor should avoid while investing in mutual funds:
Lack of Financial Goals
This is the most common mutual fund mistakes that investors make. Everyone is interested in mutual funds to achieve top financial goals in lifetime. The main objective of investing in mutual fund is to reach such financial objectives like child education, child marriage, retirement etc. Lack of investment objectives is the most common mutual fund investment mistake committed by an individual while investing his or her money in mutual funds.
For example, if you are planning for higher education of your child, you need to prepare a plan about how you can earn enough returns so that you can take care of your child’s higher education. You need to check how much time you have in your hand, what percentage of return you are targeting within that period of time, what is your current earning and how much money you are ready to invest to reach your financial goal.
By setting proper investment objectives, you can even reach your targets earlier and it can also save you from any additional burden of loans and financial liabilities. When you set financial goals like child education planning, retirement planning, child marriage planning etc, you become more focused as well as committed towards your investments.
Focus on Short Term Gains
A long-term investor should be careless about the market fluctuations as well as the losses and gains earned during short periods of time. There should be clarity in investor’s perception about how market reacts to volatility. It is very easy to start SIP but instead of just starting it, investing in disciplined manner regularly is the key to success.
The best investment strategy in mutual fund is “invest-and-forget” strategy where you keep investing your money as per your investment plan and you forget about the investment till your investment goals are reached. People starting SIP with long term goals often feel disappointed with short term returns which should not happen at all. People who stay patient during volatility are the ones who become successful in long run. Hence just focusing on short term gains is one of the common mutual fund mistakes while investing in mutual funds.
Not taking help of Mutual Fund Distributors
Taking help from mutual fund distributor in not mandatory but it is necessary to achieve your investment objectives. An investor should always take out extra time to talk with mutual fund distributors. A wrong understanding of an investor’s objectives and risk appetite by mutual fund distributor can lead to a situation where the goals set by the investor and the ones understood by the distributor are poles apart. Most of the investors invest in mutual fund without proper knowledge.
Due to this they invest in too many funds instead of choosing few mutual fund schemes which offer coverage to overall market. Investing too much in too many funds may affect the expected returns, on the contrary with the help of mutual fund distributor and few mutual fund schemes; a great portfolio can be built. Not discussing with mutual fund distributor may cost a lot and hence you should avoid this mutual fund mistake while investing.
If you are not well-versed with the mutual fund investment techniques, it is always recommended to talk with mutual fund distributor who has better experience in portfolio management as well as good knowledge of investment strategies. Doing it yourself is not a bad thing, but a lot of complicated things like picking right funds, tracking performance and reviewing and re-balancing your portfolio can be managed with the help of mutual fund distributor.
Due to this reason, we always recommend to carefully check the difference between direct and regular mutual funds and understand how regular mutual funds are better than direct mutual funds.
Emotional Decision Making
Many investors frequently login to their portfolio and often check the portfolio valuation. If market is up such investors are overwhelmed and think of booking profit immediately, on the other hand, if the market is down, such investors feel unsecured and think of stopping or pausing the investments. It has been noticed that many investors habitually let emotions influence their judgment, Investors, Indian investors to be specific, have a tendency to stop their SIPS as soon as the market shows downward trend or redeem their SIPs as soon as markets show a bullish trend.
This type of emotional decision making is awful in investment world. If you have made a commitment for an investment scheme, it is recommended to continue with it for at least 3-5 years for it to demonstrate the best of its performance. Emotional decision has worst impact on mutual fund investment portfolio and it is one of the top mutual fund mistakes.
Yes, many funds show exceptional returns when there are market fluctuations but investors who book profit from such fluctuations make profit at very trivial level. The same investors feel sorry when the redeemed funds show better performance in the long run. The biggest drawback of redeeming your SIPs mid-way is that it will disturb all your investment goals and put your portfolio at risk for long term goals. Spontaneous and impulsive exits from your investment that too based on your emotions not only hurt your portfolio in long run but also showcase a lack of patience and focus.
Too much focus on saving taxes
Yes, there is no denial that most investors invest in mutual funds to save taxes, but excessive focus on tax savings can kill your returns in long term. Choosing mutual funds by keeping tax savings in focus can close doors to better investment opportunities available in the market.
Apart from tax savings, the focus of mutual funds should be to increase the corpus and to draw good returns from investments. Excessive tax saving focus can blindfold the investor and such investor might miss the right kind of investment objectives which can otherwise show better investment appreciation. Too much focus on tax savings is one of the common mutual fund mistakes while investing in mutual funds.
Expecting Unrealistic Returns
Expecting unrealistic returns is one of the most common mutual fund investment mistakes that investors make after investing in mutual funds. Investors, who are building the portfolio with long term investment goals by beating the inflation, should always consider all the risks associated with investment and keeping this in mind, expect realistic returns.
No matter how cautiously someone pick a mutual fund scheme, it is almost impossible to predict how the market will perform in the future based on the market dynamics, how it will react to unplanned social-political issues and unforeseen company-specific factors. So preferably, one should not anticipate imaginary numbers for expected returns from an investment and it is best to stay grounded as far as the realistic returns are concerned. There are also many myths associated with mutual fund investments which you need to check before making investments.
It is always best to expect average returns from mutual fund investments but strive for above average results. Plan your portfolio based on the realistic numbers, do your research, check the past returns of a specific mutual fund scheme and identify the pattern of returns.
Disregard the risk factor
Many investors do not consider risk profiling as important part of building investment portfolio which is one of the most common mutual fund mistakes. Risk profiling is very crucial while investing in mutual funds. Risk mitigation should always be a part of setting your investment objectives or whenever you are putting your hard earned money in any financial asset.
Proper allocation in diversified portfolio can always help you in risk mitigation. It is recommended that one should not invest too much money in a single fund no matter how attractive the returns look. Calculating the risk factor is one of the important steps in choosing the right mutual fund scheme.
One should carefully plan his or her investment by evaluating the risk and only invest in funds which are well aligned with the investment goals. Remember that when you invest without considering the market risk, you are pushing yourself towards sudden anxiety and panic modes which swing with market volatility.
These are the most common mutual fund mistakes that number of investors not just commit but repeat. Investors should always remember that mutual fund is an instrument that is linked with financial market and various asset classes, thus, as a smart investor, you need to first ensure that you are making the right choice of investment at right time.
Here is a checklist that every investor should go through to avoid biggest mutual fund mistakes:
Why Chitale CFS Pvt Ltd?
Chitale CFS Pvt Ltd offers wide variety of investment avenues for short as well as long term investment needs. With more than 30+ years of experience, we are one stop solution for a number of financial products like Mutual Funds, Insurance, Bonds, Fixed Deposits etc. We serve our clients with highest standard of transparency and integrity by putting investor’s interest first.
Mutual fund investments are subject to market risks. Please read the offer document carefully before investing