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Mutual Fund Investment

Warren Buffet had said, “Price is what you pay. Value is what you get.” Investing in mutual funds has indeed become a cliché. It goes without a doubt that it is a popular option besides investing in traditional instruments. The power of compounding is what multiplies your money. However, there are some common pitfalls investors make during mutual fund investment that should be avoided. We discuss the most critical ones in the following analysis, so let’s begin!

1. Avoid investing without financial goals: Just as you have your destination in mind before stepping inside a car, you should similarly have an investment objective. Subsequently, a financial goal could be to accumulate 6 lakh rupees in the next 3 years to buy your dream car or 5 crore corpus over the next 20 years for retirement. Furthermore, if you wish to purchase a car in 1 year, you will have to invest in Debt mutual funds. If retirement corpus is the goal in question, a high exposure in equity funds is required.

2. Do not time the markets: Do you remember the time in your childhood, when you tried to jump off a puddle but couldn’t? Such is life in the investing world too! You thus cannot find the lowest point in the market. Thus, it is wise to invest a part of your money every month.

3. Do not get over-exposed to equity funds: All that glitters is not gold. Such is the charm sectoral funds, small and mid-cap funds can have on an investor. They promise high returns but are highly volatile. In a bad market, they can lead to heavy losses. It is thus important to balance small and mid-cap funds with large-cap funds in your portfolio.

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4. Say no to funds with a high expense ratio:  Imagine a highly delicious cake being prepared for you and at the time of delivering it, the baker cuts a piece of it and gives it back. It would leave you disappointed. Similarly, mutual fund houses charge a fee on the total returns. ETFs and Index funds have a minimal expense ratio of 0.05% while an active mutual fund can have an expense ratio of 0.5%. Direct mutual funds in contrast charge 1.5%.

5. Avoid constant review of portfolio: Choose the funds that suit your investment objectives. SIP is thus the way to go forward. Do you remember the old saying, “a watched pot never boils”? The same holds true for your investments. Checking it every day will only increase your anxiety. Allow some time for your money to grow.

6. Do NOT panic: It is often seen that during a bad phase in the market, there is a panic sell-off by investors. Mutual funds tend to give negative returns during such phases. However, one should not sell-off their investments. It is an ideal time to invest in the lower level and acquire more units. Once the market picks up, NAV’s will go up as well and give better returns.

Mutual Fund investment

7. Avoid ‘friendly’ tips: Investing is a serious business. A one size fits all policy may not be ideal for everyone. Do not solicit advice from friends, relatives, or colleagues as they might not be well-informed. Always prefer professional advice in these matters to stay safe.

8. Over-diversification is a sin: All dressed up and nowhere to go is an old saying and rightly so. Adding more than 7-8 mutual funds in your portfolio does not make sense and should be avoided. It reduces gains.

9. Avoid the ‘low NAV’ temptation: The most common mistake people make is to think of low NAV’s as ‘more number of units’. The penny stocks priced at Rs. 1, often trick people into believing it will become Rs. 100 (thus a 100 times profit). It can also fall to Rs. 0 leading to huge losses. Choose the stocks wisely as per your goals.

10. Lacking basic market knowledge: It is important for everyone to know how mutual funds work. Moreover, people just agree with what experts suggest without going into the reason of why a certain fund is selected. Do not blindly follow any suggestion. Do your own research.

Click here to know about the different types of mutual funds. Know the risk involved and suitability.

Mutual Fund investment

Importance of Mutual Funds

  1. Convenience: It is the most important benefit an investor gets. Investing in a single fund can give wide exposure across the financial market. Furthermore, a diversified equity fund invests money in multiple stocks and also in fixed income securities.
  2. Diversification: An investment may not rise or fall in a pattern. If the value of one investment rises, the value of others might fall and thus the overall portfolio performance will not be too affected. Diversification lowers the risk involved in a portfolio. Creating a diversified portfolio on our own will be difficult, costly, and time-consuming.
  3. Flexibility: Mutual funds are flexible. No compulsion on investors to put huge money. If they draw a monthly salary, they can choose SIP(Systematic investment plans) and begin investing.
  4. Variety of schemes: Mutual fund investment requires a minimum investment amount of Rs 500. The maximum amount can be anything an investor wants to put. The only criteria are their income, risk appetite, and financial goal which they have to keep in mind before investing.
  5. Tax saving option: Many mutual funds have tax-saving features attached to them. ELSS funds are tax exempted under section 80c of the Income-tax act and subsequently provide exemptions up to Rs 1.5 lakh a year.

Click to know more about the benefits mutual funds offer. 

Conclusion

Wealth is not an overnight phenomenon. It takes time to build it and mutual funds are the best route for wealth creation. It has the power of compounding in it which can multiply your investment subsequently. However, there are some common mistakes like investing without financial goals, trying to time the markets, overexposing to equity funds, or getting tempted with low NAV stocks. Moreover, such mistakes should be avoided to fully appreciate and enjoy the benefits that mutual fund investment brings with them. To conclude in the words of Rhonda Katz, “Wise spending is part of wise investing. And it’s never too late to start.” Happy investing!

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