10 Common Mistakes Mutual Fund Investors Make
Here are 10 common pitfalls that mutual fund investors often fall into:
- Not Investing:
- Why it’s a mistake: Delaying investment or not investing to one’s full potential can lead to missed opportunities and the power of compounding.
- How to avoid it: Start investing early and consistently, even with small amounts atleast 20 to 30% of income.
- Following Friends and Relatives:
- Why it’s a mistake: Everyone’s financial situation and risk tolerance are different, hence copying the portfolio of friends or relatives are not ideal way of investing. Every person has different goals and risk appetite.
- How to avoid it: Consult a financial advisor/coach to make informed decisions.
- Trying to Time the Market:
- Why it’s a mistake: It’s nearly impossible to consistently predict market highs and lows.
- How to avoid it: Adopt a long-term investment approach and use Systematic Investment Plans (SIPs) to invest regularly, regardless of market conditions.
- Lack of Diversification:
- Why it’s a mistake: Concentrating your investments in a few funds increases risk.
- How to avoid it: Diversify your portfolio across different asset classes (equity, debt, hybrid) and fund categories (large-cap, mid-cap, small-cap etc). Limit the exposure to thematic/sectoral funds not exceeding certain thresholds based on Risk appetite
- Ignoring Inflation:
- Why it’s a mistake: Inflation erodes the purchasing power of your money over time and a biggest enemy of common man/Investors. Assume if average inflation is 6% and if your investments yield only 5% after Tax, is your investment really growing ?
- How to avoid it: Invest in funds that can potentially outperform inflation, such as equity funds. Keep aside emergency funds or money required for short term goals in Debt/Liquid/Fixed Instruments.
- Chasing Past Performance:
- Why it’s a mistake: Many customers often refer past performance as the base criteria to pick a fund. Past performance is not indicative of future results. Market conditions and fund management can change.
- How to avoid it: Focus on a fund’s long-term track record, rolling returns, standard deviations, investment strategy, and fund manager’s experience, AMC(Asset Management Company), underlying portfolio, Risk-O-Meter, Suitability, strength of research team etc.
- Emotional Investing:
- Why it’s a mistake: Impulsive decisions based on fear or greed can lead to poor investment outcomes.
- How to avoid it: Stick to your investment plan and avoid making hasty decisions.
- Not Reviewing Regularly and Rebalancing:
- Why it’s a mistake: Over time, your portfolio’s asset allocation can drift from your original plan.
- How to avoid it: Regularly review and rebalance your portfolio to maintain your desired asset allocation.
- Not Seeking Professional Advice:
- Why it’s a mistake: Investing without expert guidance can increase the risk of making mistakes.
- How to avoid it: Consider consulting with a financial advisor to get personalized advice.
- Ignoring Risk Tolerance:
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- Why it’s a mistake: Investing in funds that are too risky or too conservative can lead to suboptimal returns or unnecessary stress.
- How to avoid it: Assess your risk tolerance and choose funds that align with your comfort level.
By avoiding these common mistakes, you can improve your chances of achieving your long-term financial goals through mutual fund investments. For more details, please contact us.