In at this journey of good creation through mutual funds, there are certain mistakes that we tend to do. The intention of this article is to make you aware of such Mutual Funds mistakes so that you can avoid these.
Most Common Mutual Funds Mistakes Whos Every investor Do
1. Considering Mutual Funds with low NAVs for Investment
Investing in case of stocks and in case of mutual funds is different. In case of stocks, you’re investing into the intrinsic growth potential of a company. So the sooner you buy this stock, there are more chances of you making profits. In case of mutual funds, you’re not investing into the intrinsic growth potential of a company but a collection of stocks and this collection of stocks could change the next day depending upon market conditions, view of the fund manager etc.
So, in the case of mutual funds, your returns are based on the difference between investment and redemption NAVs and doesn’t depend upon the level of NAV at which you have invested.
Generally, new mutual funds or NA force would have lower NAVs. These mutual funds don’t have a proven track record for you to invest in them with confidence. In that comparison, it would be the better idea to invest in two seasoned mutual funds available in the market with proven track records which help you to invest in them with confidence.
2. Investing Lower Amounts
Another Mutual Funds mistakes we do is we invest lower amounts. If you already have a SIPs or started SIP where you invest Rs. 1000 in X mutual fund and another Rs.1000 in Y mutual fund. Now you may never be invested in two mutual funds before and just to check stock market what does. you have invested a low amount but after some time you experienced that you are actually getting handsome return. But the mistake happens here where you never increase your contribution. So, here even after getting the good returns from your mutual fund.
Your overall return would come down as the major chunk of your investments are into low yield options. And so, if you feel that the what does are safe, just take that plunge. Don’t hold yourself back, increase your contributions in line with your financial goals.
3. Investing a Lumpsum amount in ELSS in the last quarter of the year
Another Mutual Funds mistakes we do is we invest the lump sum amount in ELSS in the last quarter of the year. Now data suggest that around 50% of ELSS investments happen in the last quarter of the year and around 22% to 25% investments happen in the last month of the financial year. i.e in March. Now when you do this lump sum investment you are losing the rupees cost averaging benefit offered by SIP. This concept of how you get an average purchase price when you’re investing systematically throughout the year.
Another risk involved here could be of market timing. What if the market is at the all-time high when you’re doing this lump sum ELSS investment but just because you have to save your tax. You’d go ahead and invest into the market when it is already overvalued. So hopefully, this year you avoid this mistake. and invest systematically even in your tax-saving needs.
4. Investing Lumpsum in Equity When market PE is above 25
Now the P/E ratio of general indices like Sensex and Nifty give you an overall sense of the market. These tell you whether the market is overvalued or no. If the market is overvalued and you do a lump sum investment, you are hardly going to earn any returns and you might even have losses. So if the Nifty is above 25, remember here we are talking particularly about Nifty and not other indices. So, if Nifty is above 25 a better strategy would be to invest your lump sum amount into the liquid fund and from there do an STP in equity funds.
5. Not Investing for the Right Duration
Another Mutual Funds Mistakes is not investing for the right investment duration. We generally scared of the stock market. Now anywhere the main reason for fear is lack of knowledge and so this logic stands true for everything in life and not just for Mutual Fund of stock markets. So, if you are aware of what investment vehicle is suited for what kind of a time horizon, you would be confident enough to invest into that kind of mutual fund.
For example, for three years of investment, debt funds are the good choice for 3-5 years of balanced funds are good. For 5-7 years, you should go for large-cap funds. And For 7-10 years, multi-cap funds is a good investment vehicle. And For 10+ years, you should go for small and mid-cap funds. In the case of ELSS, you should not only stay invested for three years of lock-in period but you should stay investment into these funds for 5-7 years as ELSS are equity funds.
So you must have experienced or seen that whenever you’re not matching the investment duration with right kind of fun. You might be making losses and you might be making your wrong opinions about mutual funds. So choose a fund and invest for the correct duration and you would definitely have good returns.
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6. Investing Based on the Last Year’s Performance of a Fund
Now when you match for financial goal with the right kind of mutual fund type, look at the historical data based upon this horizon again. For example, in the case of the Mid-Cap fund which is good for an investment duration of 10+ years. Look at the historical data of various funds for the last 10 years and pick the fund which has been consistent in the past 10 years.
In the case of the liquid funds which are ideal for an investment duration of three months. Most of the funds give similar returns and so here you should go for the fund which comes from a big fund house and has a lower expense ratio. So, this is how you should be logical when you look at historical data.
7. Over Diversification
The next Mutual Funds mistakes are Over diversification. A maximum of two funds per goal should be a good amount of diversification. Over-diversification makes it very difficult for you to analyze your returns.
8. Not Matching Your Risk Profile with the Kind of Fund Within a Category
Within various mutual fund categories, they could be conservative and aggressive growth-oriented type of funds. For example, in the case of ELSS category, Franklin India tax shield fund is more suitable for conservative investors access long-term equity fund is more suitable to growth-oriented investors. As the Birla Sun Life Tax Relief 96 Fund is suitable for aggressive investors while IDFC tax advantage fund is more suitable to very aggressive investors.
Let’s say, for example, you’re not aggressive investors but based upon the kind of inflows you had, you had to choose an aggressive category like mid-cap funds to reach your financial goal. So in that particular category, you could go for a fund that suits your own risk profile.
9. Buying Dividend Option When not Required
The next Mutual Funds mistakes are buying dividend option when not required. Now, in your working years, you already have the source of income. So these dividends are something you hardly depend on. But you buy it because you think it could be an additional source of income along with the primary source of income you have. But these dividends take away the compound effect from your investment. Moreover, the amount of dividend declared is minimal which could hardly serve as an additional source of income.
For example, the dividend amount declared could be just Rs. 0.6 per unit in a year. Now you might think this is a minimal amount and could hardly have any impact on the compounding effect. But you’re again forgetting that these returns would again honor returns and that is what exactly is the compounding effect.
So these are the 9 most common Mutual Funds mistakes whos every investor do. So next time be careful and avoid these mistakes for happy investing.