Top 5 Mistakes to Avoid When Investing in Mutual Funds
CA Bhaskar Abhishek
11/17/20243 min read
Investing in mutual funds potentially profits highly allowing people to increase personal capital in the long run. However, mistakes can be made even by highly experienced investors, which means they negatively affect the profits. Second, you need to learn how to avoid common mistakes if you want to get the best from your investments. In this blog, we’ll look at five common investor blunders and how you can avoid them.
Mistake #1: One of the biggest Common Mistakes that an investor can ever make is not Researching the Fund Before Investing
What It Is: Buying a mutual fund purely based on the reference of your friends, seeing an advertisement or hearing the news without knowing the fund’s aim or its performance history.
Why It’s a Problem: Many a time, selecting a fund blindly can lead to working with funds that do not match your financial plan or your tolerance level to risk. For instance, an equity fund would prove disadvantageous if the investor has little tolerance to risk.
How to Avoid It: It is important to read the fact sheet which contains information on the fund’s goals, investment focus, and risk level. However, it is necessary to analyze not only the performance in the past periods but also the conditions in which a business operated during the corresponding period.
Mistake #2: There is often a tendency to overlook Expense Ratios and fees
What It Is: Ignoring many aspects of mutual funds including; expense ratios, entry/exit loads, and other related charges to look at returns only.
Why It’s a Problem: As much as possible is preferred because high expenses can have an impact and reduce your overall profit margin. For example, a fund that belongs to a certain category could have a low net return compared to an equivalent fund that has a lower ratio for fees and expenses.
How to Avoid It: Before investing, make a comparison of various funds’ expense ratios that belong to the same category. Invest in funds that give high yields in relation to the costs of NAV.
Mistake #3: Timing the Market
What It Is: They tried to forecast the highest and lowest points in the market in the course of investing.
Why It’s a Problem: Market timing is very dangerous and most investors end up making wrong decisions due to the state of the market and not the investment plan. Just as quickly, a few lost days in the market can make a big difference.
How to Avoid It: Avoid reckless investment procedures, such as the Systematic Investment Plan (SIP). SIP investing helps to avoid the vagaries of the market and takes advantage of the rupee cost averaging system.
Mistake #4: Ignoring Diversification
What It Is: Investing heavily in one mutual fund or only buying into one kind of fund of a particular nature (only equity or only debt).
Why It’s a Problem: Lack of diversification makes your portfolio more vulnerable. If one of the fund or asset classes is poor performing the rest of the portfolio will also be poor performing.
How to Avoid It: Choose different types of Mutual funds to have a concentrated Mutual fund portfolio inclusive of equity funds, debt funds, and mutual fund hybrids. To further diversify geographically consider international mutual funds.
Mistake #5: Failure to review your portfolio is a sign of not being keen hence you do not take time to review the portfolio.
What It Is: Stock picking and then leaving your money in the funds that you have identified as the best without ever looking at how they are performing, or adjusting your investments in the right proportion.
Why It’s a Problem: Markets are dynamic and so are financial objectives. A fund that has well recently may not be as good in the future.
How to Avoid It: Biannual, or at least once a year, consider doing portfolio reviews. Review the performance of each fund, check whether it fits your goals, and adjust the portfolio, if needed.
Conclusion
The incoming section will pinpoint how it is possible to avoid these mistakes in order to improve your mutual fund investing experience. By now you are able to identify better investment opportunities through research, watching out for costs, ensuring diversification and from time to time carrying out portfolio checkups. Stock investing is not a one-shot process rather it is a lifelong process. Constant heads, focus, and action make the investments yours.
So, Happy Investing and Keep Learning !!
Article by CA Bhaskar Abhishek
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