5 Common Mistakes to be Avoided Before Investing in Mutual Funds
It’s fascinating and surprising at the same time that how conversations around and about the mutual fund market can change so quickly. And, among these conversations on social media, blogs, or any other advisory forums, the most common word that we have been hearing is ‘correction.’ This word has made a colossal transformation in the way investors invest in mutual funds.
Those who have gained experience in investing with time have understood the importance of not going for ‘DIY approach’ in selecting the funds until one has tremendous knowledge about the same.
Experts are those who have extensive knowledge and understanding about the field they work in, and they became an expert from being a novice by learning from every experience. Experts from mutual fund industry have advice investors to look at these 5 common mistakes that they can end up committing while investing. This should be taken seriously to avoid the regret -“I should never have invested in this fund” in the first place.
- The Catch-22- Selecting Fund Without Recognizing Risk-Profile and Objective.
Your neighbor had his investments in small-cap funds and he has accrued classic returns by now. You went to him asking about the funds he had invested in and without considering your risk-profile and the alignment of the fund’s objective with your goal, you started your investments. Now, you’re sitting with your hands scratching your head whilst incurring losses in investments!
To ensure that the same situation does not happen with you, experts recommend assessing your risk capacity and comprehending that every mutual fund category comes with different risk-profile. Apart from this, you must also be vigilant about whether the scheme you are going to invest in can accomplish your financial goals envisioned or not. Because some schemes have the objective that requires short-term investments while others require investments to be done for a long stretch in order to pocket in appreciable returns.
- Another Blunder-Investing Big Corpus or Surplus in One Go!
When the market is overcoming the correction period and reaching its bull phase, experts do not want to miss the chance of talking about the prospects of enhancements of equity market. Hearing the buzz all around, you create an illusion that ‘market will not go down now’ in your mind and invest in schemes in lump sum mode. You must care for the fact that volatility in the equity market is indispensable and so your lump sum investment will get more exposure to risks than SIP investments.
Thus, it’s better to go for SIP investments if you do not want to see your entire principal diminish with declining market.
- Not Looking up for a Financial Advisor- Beware, It’s a Blot.
It has been our childhood habit of following up the advice of our parents, friends, and relatives, and trusting on their instincts blindly. In case of investing, if being a beginner you opt to invest in a scheme just because your acquaintances have suggested you or the scheme belongs to top performing category, then it’s not enough. Why? Because not knowing details about objective, investment style, fund manager and his investment strategy, etc., of the scheme can mislead your investment and probably you may not be able to achieve your goals in the time decided.
Hence, it is better to turn up to your financial advisor and seek each and every detail regarding the investment. He/she can also guide you which scheme is better and what should be the investment tenure for investing in order to pile up handsome returns.
- Putting All Your Eggs in Different Baskets is Good But up to a Certain Level.
They say “Even drinking too much water is not good for health.” Similar is the deal with diversification which is good to average out the risk involved in investments, but over-diversification has the capability of ruining your portfolio. Since, too many schemes in one portfolio increase the burden of tracking and monitoring, and minify the potential of the portfolio to generate jaw-dropping returns.
If you are someone who is going to invest for the first time, you must seek the counsel of a financial advisor in order to invest in a handful of potential schemes across the spectrum.
- Lastly, Waiting for the Right Time- Considered as a Mirage!
Many to-be investors keep on wasting time by waiting for that mythical time which they can recognize as ‘the correct time’ to invest in the market. And, while doing so, they keep on losing the time on hands, hence the more they time the market, the more they keep on postponing the investments.
You should simply understand what power of compounding holds and how much appraisal it can give to your investment in the long time. Because, compounding is that eighth wonder which shows its effect on investments done with a long-term perspective.
Some legend had said, “Learn from the mistakes of others rather than committing your own!” Mutual fund market is unpredictable and predicting this market is like forecasting a world war. Since, the sample size available with us is small and the outcomes are large, so preparing is an easier option rather predicting the market. And, to prepare well, investors can make sure that they do not commit these common mistakes discussed above.
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