Common Mistakes to Avoid While Investing In Mutual Funds
Mutual funds are suitable for the investors who don’t want to invest directly into equity and debt markets but still wish to have such investment exposure in their portfolio.
However, amidst all the benefits provided by the mutual funds, here are common investing mistakes which the investors must avoid:
Comparing Mutual Fund Performance through NAVs
While the change in NAV of a mutual fund scheme is fairly reflective of the scheme performance, comparing two schemes’ performance by comparing their absolute NAVs is a misnomer. For example, a fund with NAV Rs. 85 may not necessarily be better performing than a fund with NAV Rs. 65. The growth in NAV also depends upon the investment period of the mutual fund scheme and hence, the mutual fund performance must be gauged with the performance expressed in CAGR (Compounded Annual Growth Rate) and its relative performance with the benchmark index.
Timing the Markets
When investors try to make investments in the falling markets, they are effectively trying to time the market. Taking investment decisions based on their perception of market trends is not a good idea. Instead, the investors must make regular investments into mutual funds through Systematic Investment Plan(SIPs), so that the investment cost gets averaged over a period. SIPs make the investments in the specified mutual fund scheme every month, irrespective of market trends, thereby eliminating human bias in making investment decisions.
Ignoring Financial Goals while making Mutual Fund Investments
It is suggested that mutual fund investments must be in sync with the financial goals of the investor. Different mutual fund schemes may be suitable for different risk profiles and different investment horizons. As such, choosing a wrong mutual fund scheme for any of your financial goals may affect your financial future. For example, you should not invest in a small-cap equity scheme for a short term financial goal, since equity can be quite volatile especially over the short term. Similarly, for long-term goals like retirement planning, relying solely on debt funds may not be helpful.
Having too many Mutual Fund Schemes in Portfolio
One should have a limited number of mutual fund schemes in their portfolio so that it is easy to manage and monitor the performance. The investors, typically tend to invest in many mutual funds schemes in the name of diversification. However, you must understand that mutual funds, by their very nature, lend diversification to the portfolio, as each mutual fund scheme invests in a diversified basket of securities.
Not Reviewing the Portfolio Periodically
As important it is to invest the money, equally important is to periodically review such investments. This helps you to replace the underperforming schemes with better-performing schemes. Further, your financial goals may have changed over time, and thus, the portfolio may need to be realigned/ rebalanced to align them with your changing financial goals.
Redeeming/ Stopping Investments during Falling Markets
Fear of losing the invested amount takes the front seat during the volatile times. As such, many investors decide to redeem their existing investments and stop fresh investments committed through SIPs during such a phase. However, it is the opposite of such actions that are required to be done during such times. SIPs must be continued across bull and bear markets, as the bear markets help the investors to lower their investment costs over time. Further, the investors must not press the panic button to redeem their investments during the market downtrend, as the financial goals may still be some time away.
While avoiding these mutual fund mistakes, the investors can aim for a healthy financial future in partnership with the mutual funds.