Wednesday, 5 September 2018

6 Common Mistakes to Avoid While Investing in Mutual Funds

Picture Credits: The Financial Express

Introduction

If you have not invested in mutual funds to date, you probably aren’t trendy. The monthly SIP book of mutual funds has surged to Rs. 7,300 Crore pointing to the presence of Indian investors in volatile financial markets. The main motivation behind most investments is building of wealth over time.

However, a lot of investors don’t manage to achieve their goals. There are a lot of reasons causing this to happen. Although markets could get really volatile, if you don’t take enough care of your investments your own actions maybe hamper your financial goals. Below is a list of mistakes every mutual fund’s investor must avoid.

1. Ignoring Your Financial Goals

This could easily be one of your biggest mistakes while investing. You are only investing to achieve your goals. They say, “Investing without a goal is similar to traveling without a destination”. Makes sense. You are much more likely to be more productive with your investments when there is a goal that’s already set to achieve, in which case all your investments are all in alignment with that goal.

If you overlook your financial goals, you may end up parking your money in investment vehicles that do not suit your needs. Take your child’s education fee for example. Say you want to accumulate Rs. 1 lakh to pay for your child’s education fee, it would make more sense to invest in a recurring deposit or a fixed deposit which will mature the money for you when you need it. The same is the case for long-term scenarios such as retirement.

You must never invest money in a dividend option of a mutual fund. It does not let the money multiply because investors tend to forget reinvesting dividend income on several occasions. In addition to this, the dividend distribution tax can further reduce your returns.

2. Trying to time market over time

Although SIP’s are gaining increasing amounts of popularity, there are a lot of investors which prefer standing at the other extreme. These investors try to time their investments in a way that they get the maximum returns possible. Others may sell their investments when the markets seem overpriced. This approach doesn’t work for most people, besides, of course, a few lucky ones. On one hand, some people wait for the market to correct whereas others regret selling their stock at the previous high. 

3. Being return oriented

A lot of investors choose MF investment schemes by sorting them based on their historical returns. However, this may not be the ideal way. Say you picked a debt fund in December 2016 based on its previous returns. Your portfolio, in this case, is destined for doom, due to 2 factors:
· Previous returns were a result of falling interest rates.
· Interest rates have risen in 2017 as well as 2018.
One needs to dive deep into the inner workings and factors that affect the mutual fund’s price, not rely on past numbers which are subject to volatility.

4. Putting money in too many schemes

A lot of people make this mistake and their excuse is that they’re “diversifying”. However, that doesn’t really make too much sense because each MF scheme consists of a diversified portfolio of securities. The more the schemes you buy, the more difficult it gets to track them. Ideally, your portfolio should consist of 2 to 3 schemes and you could incrementally add more investments to your portfolio.

5. Ignoring risk profile and asset allocation

This scenario is common in heady markets. The investor gets carried away by the fear of missing out. During a bullish market, investors with medium risk appetite ignore their risk profile and invest in risky vehicles such as equity funds under pressure. This situation may cause huge losses in the case that the market takes a U-turn when investors opt for small and mid-cap oriented mutual funds because sudden dips can nullify gains accumulated over months if not years. Signing up with reputed and trustworthy stock broking companies in Mumbai may help you avoid such mistakes that may cause significant losses.

6. Investing all your money at once

Investing a large amount in mutual funds can prove to be quite tricky. Fear and greed are two emotions that a lot of investors can’t handle and eventually lead to losses. If you sign all checks and forms in one click, you will be exposing yourself to timing risk. It makes more sense to opt for a systematic transfer plan which enables you to invest in specific internals to maximize your returns. You will be able to do this under the guidance of reputed and reliable financial service companies in India.

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