“Mutual funds are subjected to market risk. Please read the documents carefully before investing.” You must have encountered this customary warning after every mutual fund ad is aired. That’s because, yes, investing in mutual funds is risky, but with a few smart choices, you can reduce those risks.
Equity or share market investment has increased in the past few years. The driving factor behind these trends is equity mutual funds. Small or beginner investors, instead of investing directly in the stock market, see mutual funds as a better alternative. This reduces the risk associated with the share market for investors.
However, with all that being said, mutual funds investors make a few mistakes unwittingly. As a result, they incur low or negative returns. Here’s a list of six mistakes that you need to be aware of when it comes to mutual fund investing.
1.) Investing on the Basis of a Gush in the Market
Oftentimes, small investors see an immediate spike in the market and feel that this is the most prime time to invest in the market and take advantage of it. But often, if the market faces a sudden surge, it also has the potential to go into a slump as well.
To ensure decent returns, investing must be timely and consistent. In the case of mutual funds, a systematic investment plan (SIP) provides the options of consistent investment. On the other hand, investing based on the rising and fall of the market increases your risk factor by many folds.
2.) Making Investments Based on Fund’s NAV
Often, small investors find that investing in a smaller NAV scheme is more advantageous than investing in a higher-NAV business, thinking that it’s an “investing mutual funds for dummies” kind of thing. That isn’t true. A mutual fund scheme’s NAV isn’t the only metric to determine its efficiency.
One needs to check the scheme’s past performance, the fund manager’s track record, and what is the fund’s benchmark index. If you are uncertain about the best scheme for mutual funds, then consult a licensed financial advisor.
3.) Investing in Dividend Options
In creating a steady wealth, one must opt for the growth option of equity mutual funds, and not the dividend option. Dividend from any scheme of mutual funds is taken from the Net Asset Value (NAV) of the fund, which then reduces the NAV of your investment.
This means your fund’s value is that, and you miss the chance of getting proper advantages of compounding strength. This is raising the fund’s long-term returns, which can result in you missing the financial target.
4.) Investing in Portfolios that are Similar
Sometimes, people start investing in other similar funds when they don’t get good returns from a mutual fund. As a result, the portfolio is replenished with identical investments leaving it unbalanced. The portfolio shouldn’t contain more than 4-5 related portfolio schemes.
Otherwise, you will not be able to gain value from portfolio diversification. Select good mutual fund schemes and ensure the correct balance of large-cap, mid-cap, small-cap, and hybrid schemes are in your portfolio.
If you are finding that your portfolio has become too large for you to manage, then meet with a financial expert to build a balance in your portfolio by setting your financial investment goals.
5. Being Impatient With Your Investment
It is important to know a crucial point: equity investment provides good returns. But, unlike bank FD, there is no guarantee of a fixed return every year. One year you may have huge returns, and next year it may be less than interest on a savings account.
Hence, financial experts often suggest investing in share markets only if you can wait for 4-7 years. The veterans of the share market often say that “it’s better to devote time to the market than attempting to ‘time’ the market.”
6.) Panicking when the market falls
Sentiments control changes in the economy. It is investor sentiments that differentiate smart investors from rookie investors. Smart investors will maintain their investment in a volatile market and will continue to invest over a full market cycle. (Even if this is just an example and may not always hold true).
During the market slowdown or crash, the average investor may start selling shares in a panic. He’ll think he’s lost his investment or will lose all of its interest. On the other side, either smart investors can hang on to their investment, or add new investments at a better price.
Takeaway
The key to mutual fund investing is to stay invested for a long time and diversify your portfolio. The most important lesson to master is to spend time in the market rather than trying to time the market for better returns.