Investing In Mutual Funds? Avoid These 10 Mistakes
When investing in mutual funds, it is crucial to avoid some common mistakes that can disrupt your financial plans and goals. Let's find out what these are
Mutual funds are one of the most popular instruments for wealth-building. A 2023 BankBazaar survey titled 'Savings Quotient' notes that mutual funds are the second most popular investment chosen by Indians. When investing in mutual funds, it is crucial to avoid some common mistakes that can disrupt your financial plans and goals. Let's find out what these are.
1. Investing without doing adequate research
Many investors make the mistake of investing in mutual funds following trends or advice blindly. Investing without proper research can destabilise your financial health. When investing in mutual funds, it is crucial to review the fund's historical performance, evaluate the fund manager's track record, consider the costs, and ensure the fund aligns with your financial goals.
2. Undefined investment goals
Setting clear goals is among the tenets of strong financial planning. Not having clarity or a timeline for your goals can lead to poor decisions like choosing unsuitable mutual funds or redeeming funds at the wrong time. To avoid this, set clear goals, such as buying a house, funding your children’s education, or retirement, before choosing funds that align with your objectives and risk appetite.
3. Timing the market
Timing the market refers to the strategy of predicting future market movements to buy or sell at the most beneficial time. Executing this strategy is difficult, at best, and can lead to buying at high prices while selling at low prices. Instead, adopt a prudent approach by investing via a systematic investment plan (SIP) wherein you invest consistently over time thus mitigating the impact of market volatility.
4. Neglecting your risk appetite
Choosing funds that are unsuited to your risk appetite can lead to undue stress and prompt impulsive selling during a market downturn. One of the keys to investment planning is assessing your risk appetite and selecting a mix of equity and debt funds that aligns with your risk tolerance.
5. Ignoring investing costs
Mutual fund investments carry certain costs like the expense ratio, transaction fee, and exit load. Ignoring these costs when investing can affect your final returns, especially in the case of actively managed funds where returns can reduce significantly over time. To maximize your investment gains, choose funds with lower expense ratios. For short-term investments, find out about any additional fees that may be applicable.
6. Not diversifying your investment
When it comes to investing, putting all your eggs in one basket can jeopardize your financial health. In mutual funds, this would mean limiting your investment to one fund or asset class. Doing so can increase your risk as poor performance of that particular fund or asset class can erode your returns and impact your financial goals. Diversifying your investment across asset classes, funds, and sectors helps mitigate risk and boosts the potential for stable returns.
7. Neglecting tax implications
The tax treatment of mutual funds has a significant bearing on its returns. Taxes, such as capital gains tax, can eat into your final returns. It is, therefore, important to understand and manage the tax implications of various mutual fund types like equity, hybrid, and debt. For tax saving, you could explore Equity Linked Savings Schemes (ELSS).
8. Rebalancing your portfolio frequently
Switching between funds constantly based on their short-term performance and temporary market shifts can lead to lower returns but higher transaction costs and taxes. Instead, focus on investing for the long term. Review your investments regularly and adjust them based on your overall goals.
9. Not tracking your investments
Monitoring your investments regularly is the key to a balanced portfolio. If you invest but fail to track your investments, they may end up misaligning with your changing goals. So, routinely review your portfolio to ensure it continues to align with your goals and adjust it when needed.
10. Emotionally-driven investing
Investing influenced by emotions can lead to impulsive trading during market highs or lows, which can disrupt your wealth-building journey. Logic and strategy are the best foundation for investments. So, make an investment plan based on your goals and risk tolerance and stick to it. Short-term market changes are a part of investing which you should avoid reacting to.
Mutual funds are an effective way to build wealth. However, it is crucial to avoid some common mistakes when investing to maximise your returns. Remember to set clear goals, invest based on your risk tolerance, diversify your investments, and review them regularly for a successful financial journey.
The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.
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