8 of the Most Common Investment Mistakes in Mutual funds

8 of the most common investment mistakes in mutual funds

Mutual funds have been in the news ever since the Mutual funds Sahi hai advertisement has been all over the new. People have been shifting their funds from the traditional fixed deposit to mutual funds. If you don’t have good knowledge of the markets or don’t have too much time to follow the markets, you can invest in mutual funds. Best part of mutual funds? They are managed by professionals and you can start with an amount as low as Rs 500 Although there are so many advantages of investing in Mutual funds, novice investors still tend to make a lot of mistakes. Let’s discuss 8 Common mistakes which most investors make.

1. No financial goal: Investing without having a goal is like shooting in the dark. Most investors don’t know for what purpose they are investing. You should clearly define your financial goal before investing. If it is a long-term goal of retirement, investing in SIP would make sense and if it is a short-term goal of enjoying a foreign trip in Europe, debt funds would do a good job.

2. Reacting to short term fluctuations: We as human beings tend to react to every single news that we hear. Avoid listening to analysts on business channels and taking tips from various sources. If you don’t avoid all this earning return would become tough and you would just be buying and selling continuously instead of generating long term wealth.

3. Not increasing SIP amounts: SIP is a great way to begin your investing journey. However, a mistake that most investors make is that they don’t increase the SIP amount over a period. If your income is increasing, make sure it reflects in your SIP as well

4. Investing in too many schemes: Investing in too many schemes becomes very difficult to monitor. Investing in a mix of 5-6 schemes should serve your purpose. Beyond a certain point investing in too many schemes does not add any value. The more schemes you add the more you need to track them in terms of performance.

5. Staying away from a mutual fund because of high NAV: Many new investors often make the mistake of comparing mutual funds based on their NAV. Higher or lower NAV is irrelevant while determining the performance of a fund. Mutual fund performance is dependent on the portfolio of securities and fund manager’s performance. For example, two funds having a NAV of Rs 10 and Rs 100 that hold the same securities will deliver the same returns.

6. Not reviewing your portfolio: Among the investors who invest in the market regularly, only a few them track their investments periodically. If you review the performance of your portfolio timely, it would keep you aligned with your financial goals. Lack of periodic evaluation of funds results in keeping your portfolio filled with junk investments which keep pulling your portfolio returns down.

7. Deciding based on past performance: Past performance is not an indicator of future performance. If any agent tells you that a mutual fund has given 40-50% returns last year and suggests you invest in the same, then it is a red flag and you need to be aware. Nothing wrong in checking past performance of mutual funds, but that should not be done in isolation. Check fund manager’s objectives, AMC’s track record and taxation.

8. Dilemma of dividend funds: Mutual funds come with two option – growth and dividend option. Unlike in stock dividends where the company pays a part of their profits, which becomes an additional income for you. In mutual funds there is no additional income as such, you are paid from the growth in your investments itself, so it becomes a regular income for you and not an additional income. Many investors believe that they receive an additional income similar to stock markets, however that is not true. After payment of dividend amount, the amount gets reduced from the NAV. So, if your NAV is 100 Rs and dividend paid is 10 Rs, post divided payment it will become 90 RS.