Five mistakes that mutual funds investors should avoid in the market
It is natural for new mutual fund investors to panic when the market movement turns highly volatile. The panic often results in inappropriate actions, such mistakes are easily avoidable. Check out five mistakes every mutual fund investor should avoid in a volatile market.
The adage ‘Change is the only constant’ applies to the stock market probably far better than anything else in life. While volatility fails to budge experienced investors, a certain wave of panic spreads among investors who are new to mutual funds.
The panic often results in a host of severe mistakes that could be devastating to their finances. But the best thing is, these mistakes are easily avoidable. Let us have a look at some common investment mistakes mutual fund investors make in a volatile market-
1. Redeeming of funds
While the valuation of one’s investment portfolio going south is not a pretty sight, the ups and downs are a natural part of the market cycle. Sometimes, the erosion in wealth may continue for longer period and sharper than you’d expect. But markets start recovering as and when the sentiments in the markets improve.
So, one should avoid redeeming their mutual fund units amid volatility. If you’ve selected a fund carefully just stick to your investment and avoid making an uninformed decision.
2. Over investing without enough knowledge
You might have heard several financial experts talking about volatility being one of the best friends of long-term investors. This is excellent advice that one should remember when the market runs up sharply. Most of the investors tend to assume that it is a good time to invest more looking at the past performance, however, new investments should be made with utmost care.
One of the most common investing mistakes here may be to select funds based on the past NAV growth over the past couple of quarters or years. However, there is no guarantee that the fund would continue to grow at the desired rate. Take well-thought and informed decision if you're planning to invest more.
3. Getting the allocation wrong
It is essential that your asset allocation match your investment objective and risk profile. For instance, a lot of investors have a 60% equity and 40% debt allocation in their portfolio. As soon as the market starts falling, they either shift a lot of money from equity to debt or vice versa.
The revised asset allocation in such cases might not be suitable for your risk appetite or financial objective. So, try to stick to your asset allocation goals irrespective of the market condition.
4. Only investing in equity funds
If you’re new to mutual funds, starting your investments by investing in equity funds may be a good way to begin your investment. But, as the market expert says, don’t put all your eggs in one basket, same analogy applies to investments as well. Therefore, one of the severe investment mistakes to avoid here is investing all your money only in one asset class.
Although the equity funds have higher potential for return generation, it also come with greater volatility. Therefore, a long term investor has to create a diversified portfolio with different types of funds across the asset class as per one’s risk profile.
5. Do not follow the herd
Browse through the internet or just watch the business news channels for some time and you’ll see a lot of experts recommending a lot of things. On top of it, you might also have friends and relatives who consider themselves to be savvy investors. While they might be good too, it is not necessary to consider everything you hear or see.
If you've done your homework correctly, just stick to your own decisions which are based on the clear understanding and try to ignore all the noise. Focus on educating yourself through credible channels rather than taking advice or tips from the self-claimed "experts".
It may be challenging to manage your emotions when you're new to mutual funds and the market getting volatile does not help certainly. Just keep the points mentioned above in mind and you'd probably navigate through the difficult times without a lot of emotional turmoil or committing severe mutual fund mistakes.