Mistakes to avoid while investing in mutual funds: Mutual fund is the talk of the town. We all have seen a significant drift of many investors from traditional investment options like bank FDs to mutual funds and stock markets in recent years. People now feel more confident to invest in market-risk instruments like mutual funds.
But…
There are many people – especially new investors, who make a lot of mistakes when it comes to mutual fund investments. As a result, they may have to incur heavy losses at times.
This article covers the 8 most common mistakes to avoid while investing in mutual funds.
Mistakes to Avoid While Investing in Mutual Funds
1. Not having a financial Goal
“The trouble with not having a goal is that you can spend your life running up and down the field and never score.” -Bill Copeland
You should define your goal before making any kind of investment in mutual funds. You need to categorize your goal as short or long-term. This will help you choose the right fund and give you a rough estimate of your investment.
2. Not doing proper research before investing in mutual fund
“Any Investment without proper research is worthless.”
Many people invest in mutual funds without performing enough research. As a result, they often choose the wrong funds and their investment portfolios do not prove to be as fruitful. As an intelligent investor, you should thoroughly investigate a fund before investing in it.
An investor should match his/her objective with that of the fund. You can get all the relevant information of a fund from its offer document such as fund objective, scheme type, past performance, details about the asset management company, classes of the underlying assets, etc.
This article can give you the necessary insights on how to select the right mutual fund scheme.
3. Reacting to the market’s ups and downs
We all know that mutual funds are subject to market risk and it is not possible to predict the next movement in the market. This means the market undergoes both bearish (down) and bullish (up) trend over a period of time.
Many investors stop their SIPs in case the market witnesses any setbacks. This can prove to be a wrong decision from investment point of view. You should continue your SIP in every situation without being nervous about the market’s downtrend. This averages out your rupee-cost and help you earn profit in the end.
4. Waiting for the right time to invest
You should never wait for the right time to invest in mutual fund. This is because the market undergoes with several ups and downs over a short period of time and it’s never easy for common investors like us to predict whether the market will go up or down. It matters more when you look to trade rather than invest in the market.
5. Not establishing an emergency fund
Many investors invest in mutual funds to fulfil their long-term goals. They have to invest with discipline in a regular way to achieve the desired corpus for their goal.
The question arises: is life that easy?
Definitely not.
We are aware that life is unpredictable and that unexpected events may occur. Most of the investors sell their mutual fund units to face such situations. As a result, it becomes difficult for them to build the corpus again.
This is where the role of Emergency Fund comes into effect. As the name suggests, this fund should be kept in hand to meet emergencies like medical expenses. In case of not having an emergency fund, investors have no option but to redeem their units and pay the exit load in the end.
This will help you to continue investing even in unforeseen circumstances.
6. Investing without knowing the difference between regular and direct schemes
This is a common mistake from the investor’s side. You should know that mutual fund has two plans viz Regular and Direct. Both have different specialties and you must be aware of that. Let us take a quick look at them.
| Regular Plan | Direct Plan | |
| Intermediary | An intermediary is present in a regular mutual fund. This means he will buy units from the AMC on your behalf and so will receive commission. | No intermediary is present in case of direct mutual fund. Here you buy units directly from the AMC or Fund House. |
| Expense Ratio | Expense Ratio is higher in regular plan because the fund house has to pay commission to the third party and is deducted from the investor’s returns. | Expense Ratio is lower in direct plan because there is no payment of commission to the third party or broker. |
| Returns | Regular plans have lower returns because of the higher Expense Ratio which rises due to the payment of commission to the broker. | Direct Plans offer higher returns due to lower Expense Ratio. |
| Ease of Investing | Regular Plans are a bit complex than Direct Plans as you have to consult a broker for investment. | The process of investment is easier in Direct Plan as you can invest on your own and also eligible to make your own decisions. |
I hope you have understood the difference between both the plans. To summarize, you can opt for Regular Plan if you are unable to take investment decisions and need an agent to do so. Otherwise, you can choose Direct Plan because it’s better in every other aspect in comparison to Regular Plans.
7. Giving more preference to dividend funds than growth funds
Many people prefer Dividend Funds over Growth Funds. This may be because of the regular dividend one receives in the former.
This mistake can prove to be costly if your focus is on long-term wealth creation. This is because the dividend is paid to the investors from the profit made by the scheme in dividend option. As a result, there is a decrease in NAV of the units of such mutual fund.
On the other hand, you will not receive dividend in the Growth Option and hence this amount is re-invested in the market instead of being paid out to the investors. Compounding plays its role perfectly in the growth option and hence you can build up a huge amount over a long period of time. You may prefer this option if you do not require regular cash flow and wish to meet any long-term goal.
8. Not reviewing the Investment Portfolio periodically
This is a common mistake from the investor’s side. Many investors don’t find it necessary to track the fund’s performances at regular intervals. This carelessness may cause the portfolio to be overburdened with low-performing funds that continue to lower the average portfolio return down.
An investor should review the performance of each fund in the portfolio periodically. This will keep you aligned with your financial goals. Moreover, it will enable you to take timely investment decisions and help you rebalance your portfolio.
This was all about the mistakes in mutual fund. I hope this article will prevent you from repeating such common mistakes and help you take wise investment decisions!
If you find any query, drop in the comment section below. It will be my pleasure to help you!
Happy Investing!!