Common Mistakes to Avoid while Investing in Mutual Funds

Do you make the right choices while investing in mutual funds? Or are you making the same common mistakes individuals make while investing in mutual funds? 

Currently, investors are increasingly getting acquainted with the concept of investing in mutual funds. Due to their flexibility and strategic foresight, mutual funds are among the best investment plans for you and your family and are suitable for all types of investors.

However, when creating your investment portfolio, there is a possibility that you will make similar mistakes as many other investors, whether they are new to the field or experienced.

If you aren’t aware of the Dos & Don’ts of investing, then this blog is for you. 

1. No definite objective :

As there are various kinds of mutual funds, you should invest in the right one as per your risk and investment horizon. Different mutual funds have different investment benefits. 

Once you have decided on the type of goal, be it long-term or short-term you can opt for the type of fund that aligns with your investment objectives, making asset allocation easier and more effective.

For example, if your goal is to plan for retirement, usually over a long period of time (10+ years), which means you can bear fluctuations in the market and invest in riskier assets for higher returns like Equity Funds.

2. Making decisions based on previous performance only

Investors typically believe that choosing mutual funds with a strong performance in the previous year is a wise decision, in anticipation of continued success in the current or future periods. However, this strategy is flawed because what was successful before may not be successful in the future. Depending on market conditions, a fund that performed well in one year may not perform that well in another.

Let’s take an example to understand this better:

In the above table, you can see the two-year data of the total return index of the IT sector. An investor, Mr John who is not aware of the market fluctuations, invested in NIFTY IT TRI looking at only the impressive 2021 return. He did not consider the present market conditions and thought that the scheme would perform similarly well in 2022 too. But, the returns of NIFTY IT TRI fell to -24.46 and Mr. John faced a loss. 

If he had properly analysed the market, then he would have an idea that the scheme might not perform well like last time.

3. Assumptions that there are no risks involved 

We have all heard a line whenever a mutual fund advertisement plays. Does it ring a bell? Yes, I am talking about the statement, “Mutual funds are subject to market risks, read all scheme-related documents before investing.” This is not just an empty warning; rather, it is an advice, because people generally want to have guaranteed returns. Even the funds, which are said to be safe and carry less risk, have the possibility of fluctuations in their returns depending on market volatility.

4. Funds are not fixed deposits

When a person comes across the defined description of debt funds, they often confuse it with the popular service of fixed deposits offered by banks. 

Debt funds allocate capital to fixed-income assets with established interest rates and maturity periods.

Hence, if you are an investor who is not able to take risks and opts for debt funds such as fixed maturity plans, liquid funds, short-term plans, etc, do not consider them risk-free like fixed deposits, as debt funds entail some level of risk.

The returns an investor receives from a debt mutual fund can fluctuate based on the prevailing interest rates in the economy.

5. Panic Withdrawal & Discontinuation of SIP 

The market is not always stable, it has its highs and lows. The investors who get this are able to suffice in the long run. But the investors who ‘panic’ seeing a little bit of negative returns even before the completion of their investment horizon and withdraw their money thinking that they might even get into more losses.

However, they fail to understand that they need to let the overall investment horizon complete to get their desired rate of return in mutual funds.

So, if your goal is long-term, let the horizon complete, don’t think of withdrawing even if the market goes a little down, and don’t follow what others are doing.

Investing in SIP should not be irregular, and you should put in your money during the decided period to get the corpus you have thought of.

Being irregular and stopping your investment in the middle of your horizon will only lead to losses.

6. One shoe does not fit all

“Oh! My uncle invested in this scheme and gained profit. I think I should do it too.”  You might have also thought of investing in some scheme which benefited your relative or friend, right?

But let me tell you there is no guarantee the same scheme can benefit you too. Everyone has a different portfolio and a different risk profile, and that is why we say “one shoe does not fit all”. Your investment portfolio is unique and fit for your goals and objectives, and following someone else’s path can never be beneficial for you.

Without understanding the market ups and downs yourself, it is not possible to benefit from mutual funds. So it is advisable to build your portfolio and invest in schemes aligned to your objectives.

7. “I can do it myself” should be avoided

If you are someone who has in-depth knowledge of the market, then investing on your own can be an option. But if you are someone who is a beginner or even mediocre at market knowledge then the “I can do it myself ” should be avoided. Generally, such people invest by just looking at the past performance of mutual funds which as discussed earlier should not be followed.

An investment consultant should be your pick because they can help you achieve your goals. They can assist you not just in investing, but also in designing a portfolio that suits your risk profile and is advantageous.

Instead of seeking guidance from friends, relatives, acquaintances or attempting to do it alone, it is better to hire a professional.

8. Not reviewing portfolio from time to time

Making investments and neglecting to monitor your portfolio is a serious error that many investors frequently make. Having a variety of investments in your portfolio increases the likelihood that the market may have influenced some or all of the funds you have put money into.

Putting money into investments is similar to planting a tree. If you neglect the tree by not giving it sufficient sunlight and water, you won’t be able to monitor its growth and well-being.

Similarly, checking the growth of your investments is also necessary.

Hence, it is necessary for you to check up on your portfolios regularly and align them with the current market scenarios.

Bottom Line

If you have come this far in this blog, then you might have understood that investing carries the responsibility of being aware of your investments and avoiding the common mistakes even pros tend to make in mutual funds.

Please share your thoughts on this post by leaving a reply in the comments section. And don’t forget to, check out our recent post on “Right Time to Invest in Mutual Funds 2024 Explained in Detail”.

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