Mutual fund investing is quite a complex task and is generally accompanied by mistakes that investors commit. These mistakes are a result of multiple reasons like lack of knowledge about mutual fund investing, not planning properly and the burden of responsibilities to name a few.
Yet, investing in mutual funds is quite important for building up a wealth corpus and providing for the family in accomplishing all major life goals. Do not rush while investing in mutual funds as hurrying into these will definitely lead to unintentional mistakes.
- 1 Here are the Top 10 mistakes that Investors commit;
- 1.0.1 1. Setting Unrealistic Expectations
- 1.0.2 2. Not Setting or Unspecified Investment Goals
- 1.0.3 3. Undiversified Portfolio
- 1.0.4 4. Over Diversified Portfolio
- 1.0.5 5. Deciding on Short Term Performance
- 1.0.6 6. Frequent Trading of Funds
- 1.0.7 7. Investing Only for Tax Saving
- 1.0.8 8. Missing on Portfolio Review
- 1.0.9 9. Missing Out on Inflation
- 1.0.10 10. Emotional Investing
- 1.1 What is a Mutual Fund?
- 1.2 What is an Equity Mutual Fund?
Here are the Top 10 mistakes that Investors commit;
1. Setting Unrealistic Expectations
To begin with, the list of mistakes, setting unrealistic expectations tops the charts. Investors think unpractically while investing their money, energy and time in mutual funds and perceive mutual funds are money machines that generate money without any downside. The reality strikes when markets crash and there is some bloodshed. As an investor, you must understand that mutual funds are subject to market movements.
2. Not Setting or Unspecified Investment Goals
It is understandable that initially, you may not have an exact idea of your goal and you may start investing with a vague idea but this should not continue as such. You must set appropriate life goals towards which you are invested in order to have a well-planned approach and a well-diversified portfolio. If your objectives are not set, you will most likely be doing unplanned investing which will ultimately lead to underperforming funds and a load of debt overhead.
3. Undiversified Portfolio
Portfolio diversification is as essential to mutual funds portfolio as is air purifier to humans these days. Without the air purifier, you would be breathing in dust, pollution, harmful particles along with some oxygen. Similarly, when you invest in mutual funds and stick to a particular sector or particular fund type, you are on the verge of a breakout as even the slightest jerk in the market can cause a greater impact on your portfolio due to over concentration.
Diversifying your portfolio across varied domains allows you to invest in different sectors, different companies, and even different nations. This way you are hedging your portfolio against any systematic risk that may prevail in a particular sector.
4. Over Diversified Portfolio
This is contrary to the previous point, over diversified portfolio is one which is extremely spread across different domains, sectors or so. The essence of diversification is to have 5 or 6 funds from different sectors to balance out the risk and volatility from your portfolio but overdoing it would mean more or less you are invested highly in a broader domain. The essence of diversification lies in investing in sectors that are unrelated like you may consider investing in pharmaceutical, automobile, IT, FMCG, etc.
5. Deciding on Short Term Performance
The investment market is a highly active place that keeps changing trends from time to time. The working of the investment market is in cycles which is a bull market-bear market-bull market-bear market and so on. Hence, a temporary phase of fall is unavoidable but basing your investment decisions over these short term trends of the market is not wise. Similarly, you must not judge a fund for its one-time high returns or an overall industry boost. When you plan to invest in a mutual fund and are here to stay invested over the long-term, base your decision on the long term performance of the fund as well as the company. This will give you a deeper insight into the company’s strategy, dividend policy, and share performance.
6. Frequent Trading of Funds
Patience is a virtue when you are investing in mutual funds. no great investor become great overnight or within a month or even within a year, it takes time to build up the wealth of your dreams. Hence, it is crucial that you stay put with your investments and let the money grow.
Investors who panic over temporary market fluctuations end up doing excessive trading and lose a majority of their potential wealth due to unplanned redemptions and investments.
7. Investing Only for Tax Saving
Yes, tax saving has been a key reason for investors to look to investing in mutual funds due to its benefits under section 80C of the Income Tax Act, 1961 but should not be the only reason for it. Focusing your portfolio over funds that are tax-friendly can hamper the overall growth of your portfolio. Your portfolio might be capable of generating greater returns if investments are planned accordingly and not focused only on the tax-saving part.
8. Missing on Portfolio Review
Once you have invested in the mutual funds of your choice, it is imperative that you expect greater returns from them all after much speculation. Yet, there may be some underperformers in your portfolio as the market is not ignorant. You must stay in touch with your investment portfolio and revisit it twice a year to ensure that there are no underperformers that are eating all your build-up. In case you happen to find some, it is important that you weed out such funds.
9. Missing Out on Inflation
If you miss out considering inflation while planning your investments then it is a major mistake. Inflation is considered to be as silent money eater that banks on your profits. With the current scenario prevailing, the inflation stands at a hefty 6% which means 6% of your money is gone to inflation’s tummy. If you look ahead a few years or even calculate the past trends, inflation has almost balanced out the profit earned of people. Hence, it is important that you invest in mutual funds that are inflation-proof or provide returns that are inflation-adjusted.
10. Emotional Investing
Have you ever been in a situation when you get pumped by your family or friends to start investing with its benefits all around and somebody just slides in the name of a fund they are invested in and going all gaga about it? Or maybe when your mom is scolding you for spending whatever you earn and then simply slide in the idea of how Sharma Ji ka beta is saving so much in a particular fund? This is exactly when your emotions play you and you fall victim to the marketing strategy of investing. Never invest in mutual funds when you are overpowered by your emotions be it happy or sad. Emotional investing can prove extremely harmful to the health of your portfolio and can lead to all your profits being eaten up.
Make sure you have crossed all these pointers before investing in mutual funds. Learning from others’ mistakes is much wiser than committing your own when money is concerned.
What is a Mutual Fund?
A mutual fund is an investment made by the money pooled from various investors who are invested towards a common or similar goal and wish to earn profits over their investments. Both corporate and government securities can be bought by the money pooled from the investors and are professionally managed by an expert called fund manager. The funds can be classified based on their equity exposure, risk profile and loss coverage.
What is an Equity Mutual Fund?
Equity Mutual Fund is a type of mutual fund that predominantly invests in the stocks and shares of a company. Simply put, the minimum investments in equities should be 65% for a fund to be declared as an equity fund. The remaining 35% can be invested as per choice in money market securities, debt securities, etc. the equity funds are slightly on the higher side as far as risk is concerned but are fully capable of providing with inflation-beating returns.