Mistakes to avoid while investing in mutual funds

By June 24, 2020 Money Matters

Source with thanks from cnbctv18.com

Over the years mutual funds have become a very popular way of investing for the long term. Of course mutual funds do provide appropriate schemes for the short term too. Most of you who are reading this are likely to have adopted or adopting mutual funds rather late in life. So it’s a good idea to be alerted to some common mistakes investors make while making investments in mutual funds. The author in the piece below highlights such potential mistakes that you should stay clear of. Team RetyrSmart

Mistakes to avoid while investing in mutual funds

Here are some cardinal mistakes to avoid while investing in mutual funds.

Investing without a goal

The exercise of asset allocation determines how much one should invest in which asset, depending on their goals and risk profile.

For instance, youngsters saving for retirement can invest more in stocks because they won’t need the money soon. An affluent older person having met most of her goals can possibly afford to take more risks compared someone less well off.

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But many people invest in mutual funds without identifying a specific purpose.

“If somebody is investing for retirement, it doesn’t matter whether the investments are down 20 percent today. It’s vital to define short term, medium term and long term financial goals and invest accordingly,” says Ankur Choudhary, Co-Founder and CIO, Goalwise.

Getting impacted by markets

If you have spelt out your long-term goals and invested in equity mutual funds, it is important to take stock-market related volatility in your stride. Remember, the market can go down swiftly but equity tends to do better than other asset classes over long periods of time.

A good way to beat the nervousness associated with volatility is to invest through  the SIP mode of investment. It averages out the risk of equity investment over a period of time and allows investors to buy more units of a mutual fund when the market is low and reduce the per-unit cost of investment.

Investing in too many funds

While it is always good to diversify an investment portfolio, remember there can be too much of a good thing.

Studies show that “unsystematic” or company-specific risk can be diversified away by investing in a portfolio of roughly 30 stocks. This can be achieved by investing in 2-3 mutual funds. Throw in another 1-2 funds as small “satellite” holdings, targeting a particular theme. Anything more would be too much.

Investments done on basis of past returns

Many people invest in mutual funds after looking at their past track records, or ‘star ratings’, which are also derived from track records.

This is is not right,” says Raghvendra Nath, MD, Ladderup Wealth Management. “Investors should do a complete evaluation of the fund before investing in it.”

That includes trying to understand why the fund has performed the way it has. Case in point, a fund may be doing well because it is taking too much risk by, say, investing in a ‘hot’ segment of the market. Soon, the fad will be over and you can be assured that the good patch will be followed by bad.

Excessive focus on tax saving

Some mutual funds have a tax advantage, which makes them attractive investment destinations. That should, however, not be the sole guiding principle.

“Invest to increase corpus and get good returns rather than focusing only on tax saving. That will also help investors in choosing the right fund,” say MF experts.

For instance, perhaps a non-tax saving mutual fund makes for a better fit in your portfolio because you can take higher (or lower) risks.

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