Avoid making these common mutual fund mistakes
Every individual’s financial goals are unique depending on factors such as their life situation, income, and risk tolerance, among others. That is why your mutual fund investment portfolio needs to be customised to meet those specific goals. Whether you want to generate a steady income or grow your wealth over time, one thing is clear – you need to invest strategically.
But even with the best intentions, it is possible to make poor decisions that can cost you significantly in the long run and impact returns. On that note, here are the four most common mistakes investors make with their mutual fund portfolios and how to avoid them.
- Investing without a definite goal
Different mutual funds have different investment goals. Some are better suited for short-term goals, while others might be more appropriate for long-term investments. Similarly, some funds may focus on tax saving, while others, like debt funds, may provide you with higher liquidity.
So, it is important to have a clear idea of what you want to achieve with your investments before you start investing. This will help you choose the right mutual fund scheme and also track your progress over time. Without a goal, it is possible to get side-tracked or invest in something not aligned with your financial goals. For example, if you are looking for growth potential, you may consider investing in equity mutual funds.
- Not knowing your risk tolerance
Risk tolerance is the amount of risk you can tolerate with your investment. It is observed in three forms – aggressive, moderate, and conservative. For example, if you have a low-risk tolerance, you may want to invest in a debt mutual fund that invests in securities such as government bonds. These funds typically have low returns, but they are also less volatile. And if you have a high-risk tolerance, you may consider a small-cap equity mutual fund. These funds typically have higher returns but are also more volatile.
- Not diversifying your investments
When you diversify your investments, you are investing in different asset classes and sectors. So, if one particular security declines, the others may protect your portfolio against market volatility and losses. The best way to diversify your investments is to invest in a mix of stocks and bonds. You can further diversify your portfolio by investing in international stocks, bonds, real estate, etc. You can see the asset allocation of each online mutual fund easily on the website of the mutual fund house.
- Chasing only top-performing funds
Just because a fund has done well in the past does not mean it will continue to do well in the future. When choosing a mutual fund scheme, focus on its long-term performance rather than its short-term gains. Look at how it has performed over the last five or 10 years rather than just the last year. This will give you a better idea of its true performance.
In addition, remember the fees involved when you are considering a fund. A fund with a high expense ratio may have higher returns, but it may also reduce your profit margin. Many experts believe that high fees can only be justified if the investment is consistently generating higher returns as compared to low-cost options.
Aside from those listed above, investors must avoid other mutual fund mistakes too. These include having unrealistic expectations, attempting to time the market, impulse buying and panic selling, investing without emergency funds, not monitoring the fund’s performance regularly, and most importantly, not consulting financial advisors.