Common Mutual Fund Mistakes to Avoid

A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds give small or individual investors access to diversified, professionally managed portfolios.

There are numerous significant factors to consider before investing. You should clearly understand what you’re investing in, take your time, and choose a path that fits your financial goals and investment capacity. Every investor’s risk appetite differs from that of others. Therefore, one should tailor their investment strategy to their risk appetite and time constraints.

In reality, every investor makes a mistake while making investment decisions.

  1. Not starting with a financial plan- Many of us start investing right away without first giving a thought to what we want to achieve with our investments. Without a financial plan, investing is like shooting arrows in the dark. Even if you do your SIPs diligently and have a long-term focus, you won’t know how much to save for which goal without a financial plan.
  2. Not reviewing your portfolio- Yet another common mistake that investors make is that they don’t review their portfolio periodically. This is essential. It helps you to cut down on risks and problems. And this can help you boost your returns.
  3. Investing heavily in mid- and small-cap funds- In bull runs, these funds tend to give amazing returns, and many investors find that too difficult to ignore. So, it’s obvious that people would want to invest in mid-cap and small-cap funds. But these funds are not meant for everyone. Only if you are willing to take higher risk for better returns should you invest in mid- and small-cap funds. If you are someone who doesn’t like too many ups and downs in your portfolio, you can very well remain with diversified equity funds.
  4.  Investing In Sectoral/thematic Funds- From time to time, different sectors and themes do well in the market. Many investors are attracted to sectoral and thematic funds due to their short-term returns. However, investing in these funds is riskier than investing in diversified equity funds. A major challenge of investing in sectoral and thematic funds is guessing which theme will work.
  5. Chasing Performance- Chasing performance is a mistake most of us have made. After all, it’s tempting to see a fund give high double-digit returns and invest in it, hoping that its dream run will continue and one will earn those returns. Unfortunately, in most cases, it doesn’t happen. That’s because top performers change every year.
  6. Over-Diversified Portfolio- Investing in too many funds is a common blunder made by investors. People frequently acquire identical funds in the guise of diversity, which defeats the objective of diversification. For example, investors desire a diverse portfolio, and a typical mistake that investors make at this stage is to invest in various mutual fund firms with the same capitalization.
  7. Not paying attention to the fund management team- It is one thing to say that institutions are larger than people but the fund manager and his style matter a lot. Given a choice between two fund managers, opt for the more consistent fund manager. A good fund manager has been consistent in past performance and held the core fund management team together.
  8. Choosing dividend plans over growth plans- If you are holding an equity fund for your long-term goals, don’t make the mistake of opting for dividend plans. Dividend plans deplete the corpus whenever dividends are paid out and hence your overall wealth creation gets impacted. Instead, prefer to put money into growth plans as they are automatic compounders. 

Key Takeaway

Investing in mutual funds entails risk, just like any other type of financial investment. If you’re looking for a long-term investment, you may expect a return of 10 to 15%. Yes, depending on market conditions, the returns will vary. Investors might expect higher profits if the markets are performing well. One should avoid comparing mutual fund returns to stock market returns. As opposed to mutual funds, stock market investing requires time, money, and knowledge, as well as it involves a higher level of risk.

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Yonita is the pillar of Client servicing at Moneyfront. She has worked with Citibank for over 25 years in operations and client servicing. In her stint with Citi, she has managed large service setups and her rich experience of banking spans across managing clients, operations, audits and compliance matters. She epitomises ‘client excellence’ in the true spirit of the word. Her motto and single-minded focus is to make sure every client is a happy client.