5 Common Mistakes To Avoid While Investing In Mutual Funds

Mutual funds play a pivotal role in helping investors to create wealth. We have all been wowed by the potential charm of compounding and how it can help our money grow over time. Mutual funds are undoubtedly one of the best investment options available to both new and seasoned investors.

That said, investing in mutual funds can be both exciting and daunting at the same time. These schemes are increasingly gaining acceptance among investors in India owing to their simple nature and potentially high returns that they offer.

There are majorly two ways to invest in a mutual fund- putting a lump sum amount (a big chunk of money) at once or investing on a monthly basis with an amount as small as Rs.500 (SIPs). According to the Association of Mutual Funds in India (AMFI), the mutual fund industry has added about 9.74 lakh Systematic Investment Plan (SIP) accounts each month on an average in FY 2018-19.

I believe that if you want to invest in mutual funds and by association in the stock market for the long-term, you must not get bothered by two inevitable situations- the bear market and the bull market. If you do not invest smart, your investment may end up becoming a liability.

So, regardless of the mutual fund you plan to invest in, there are certain things that you as an investor must do to ensure you are financially secure at all times.

1. Don’t Invest Without Mapping Your Financial Goals

Investing without a goal is equivalent to travelling without a destination. You must choose an investment vehicle based on the duration and flexibility of your financial goal. You can begin by investing through SIPs because they help average out your entry points and hence automatically cover for market volatility.

2. Don’t Invest With A Short-term View

It is a rule of thumb that mutual funds yield great returns in the long-run. You must give ample time to your mutual fund to grow. I would suggest that you keep an investment horizon of at least five to seven years, if you want to avoid a possibility of losing your capital. When you stay invested for the long-term, the ride on equity becomes smooth and the volatility is evened out.

3. Don’t Invest In Too Many Funds

While it is always a great idea to diversify your investment portfolio, you must ensure that you do not park money in a large number of mutual funds. This is essential to avoid the inclusion of too many under-performing funds in your portfolio, which could bring poor results. For instance, with large number of funds, multiple SIPs are deducted on different dates of the month. So, you may not have sufficient balance in your bank account for payment towards SIPs on particular dates. Also remember, not to invest all your money in one scheme. Start small, and gradually increase the investment amount as you understand how this works.

4. Don’t Ignore Your Risk Profile

I often feel that in a bull market, investors tend to ignore their risk profile and invest in risky avenues under peer pressure. If you are risk-averse, you must avoid investing in equity funds and rather put your money in debt funds. Immediate redemption of funds takes about 1-3 business days before you get hard cash in your bank. So, I recommend you weigh your risk appetite and strictly adhere to your asset allocation. My advice would be to keep at least six months’ worth of living expenses in your bank account as emergency fund at all times.

5. Don’t Forget To Analyse & Review Fund’s Performance

Failing to review your scheme’s performance periodically can cost you a fortune. Youmust monitor the performance of your fund to stay aligned with your investment goals. In my opinion, the ideal review period must be one year. As per the performance of your scheme, you can decide to shift or increase your investment.

Your mutual fund portfolio must be built within the framework of your overall financial plan. Though mutual fund investments are on the rise, it is essential to know what you are doing while and after investing. Shallow knowledge and undisciplined approach towards mutual fund investments can lead to uncertainties. Money well-invested is money earned, so make sure your hard-earned money is appropriately managed.

The author is the co-founder at CashKaro.com