In the last few years, mutual funds have emerged as one of the top investment options, especially for retail investors, due to digitalisation and increasing financial awareness. However, there are some common mutual fund mistakes which mutual fund investors tend to make. With more awareness, investors can avoid such mistakes. Here is a list of five such mistakes that you can easily avoid next time when you invest in a mutual fund.
1. Investing without thorough research
Often, you will see people picking up mutual fund schemes on the basis of what their friends or colleagues or family member suggest. While you can take the suggestion of anyone who is your well-wisher, that doesn’t mean you skip your research and analysis.
You need to understand and evaluate the funds’ past performance, constituents of the fund, fund manager, average return, rolling returns and other aspects. Then compare it with other funds in the same category. One of the best ways to get this information is the fact sheet of the fund.
A fund fact sheet is an excellent resource for getting essential information about a fund, such as its past performance, constituents, and its performance against the benchmark. By examining the fact sheet, you can gain valuable insights into the fund’s overall performance and make more informed investment decisions.
2. Investing without assessing your risk profile and investment tenure
Another mistake people make under peer pressure is investing in funds without considering their investment risk appetite, investment tenure, or financial goals. You and your friend might not have the same risk appetite or same financial goals. Thus, while investing in a fund suggested by your friend, you need to analyse whether the fund’s risk profile matches your risk appetite and if the investment objective is aligned. Suppose your friend has invested in a small-cap equity fund with the financial goal of buying a house after ten years and has a high-risk appetite. However, your financial goal is to go on an international holiday in the next two years, and if you invest in the same small-cap fund, you may see your investment returns are negative when you need the money after two years. As the volatility in small-cap funds is high, these funds are suitable for long-term financial goals and people with a higher risk appetite.
3. Over-diversification
Putting all your eggs in one basket can be risky, but that doesn’t mean you put one egg in one basket and make hundreds of such baskets, isn’t it? So, while diversifying your investments can help you mitigate your investment risk to a great extent, what many mutual fund investors do is buy multiple funds without assessing their performance or risk factor to diversify the investment. This makes it difficult for them to monitor every fund.
So, it would be best to diversify your investments in a proper manner. You need to diversify in a way so that if one fund underperforms, your overall portfolio return doesn’t take a big hit.
4. Expecting Guaranteed Returns
Another common mistake that often most new investors and even a few experienced investors make is expecting guaranteed returns from funds which are unrealistic. Often investors have a misconception that debt mutual funds are risk-free and offer guaranteed returns. However, that is not the case. Mutual fund returns cannot guarantee returns, and the returns are linked to the market. It is true that the returns of debt funds are generally less volatile than equity funds in the short run, but the returns are not fixed.
5. Putting all the money in mutual funds
While with equity mutual funds, long-term investment can offer better returns, that doesn’t mean that investors need to keep all their savings in equity funds. For contingencies and other short-term financial goals, you must keep a portion of your funds in debt mutual funds, too, such as liquid funds.
In such a circumstance, you don’t have to redeem equity mutual funds, which are meant for long-term financial objectives.
As equity mutual funds are more volatile than debt mutual funds, withdrawing from equity funds without proper planning can lead to a loss of returns.
So, the next time you invest in a mutual fund, make sure you don’t repeat these mistakes, and you can do the same just by being a little conscious and aware.
