Five big mistakes that mutual fund investors make and how to avoid them

Mutual funds have been gaining a lot of traction in the past few years. It added 2.32 crore folios between 1st April 2016 to 31st March 2018. Besides, the ‘Assets Under Management’ of the industry during this period increased to Rs.21,36,036 crore from Rs.14,21,952 crore, registering a growth of 50% in just two years. Mutual funds are playing a decisive role in helping investors grow their money. But as investors continue to invest in mutual funds online there are a few common errors that we must keep away from, while making the most from our investments.

The article lists the top five mistakes investors make while investing in mutual funds and how to avoid them.

  1. Unclear investment objectives

A common yet grave mistake some budding investors make is to invest in mutual funds without setting clear investment goals. You can avoid this by chalking out your financial plans and having a clear understanding of what you want to achieve in a particular period. For example, you could have a short/medium-term goal of buying a car or a long term goal of purchasing a property. Each type of goal would require a different investment strategy.

2. Timing the market

Many investors wait for the ‘right’ time to enter the market. However, this practice can be futile as it is practically impossible to time the market; rather, the goal must be to look at the larger picture. One must look towards investing in mutual funds to create wealth and staying invested for the long term. The time spent in the market matters more than timing the market.

3. Lack of diversification

The optimum way to reap the benefits of mutual funds is to create a diversified portfolio. Often investors end up investing in a particular investment sector alone which can be a risky proposition. For instance, if the industry performs poorly, the investor could end up with losses. It is advisable not to allocate more than 5% to 10% in a single investment.

4. Letting your emotions rule

Being an investor, you cannot afford to let your emotions drive your investment decisions. Proper research, understanding facts, and analysing past performances/trends can help you make the right investment decisions. You can follow a disciplined approach of investing through SIPs so as not to deviate from your goals.

5. Fail to account for inflation

Many investors fail to account for the rate of inflation and instead focus on nominal returns rather than actual returns. It is essential to consider how rising costs can affect your profits; hence, it can help to calculate the amount you need to invest to meet your investment goals accordingly.  

Conclusion

Creating the right mutual fund portfolio to reap enhanced mutual fund benefits can be a complicated task. It is crucial to develop a systematic plan in line with your financial goals to achieve success in your mutual fund investment. SIP investments offer a disciplined approach to investing and can help you succeed as an investor.

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Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.