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Mistakes to Avoid While Investing in Mutual Funds

IndianMoney.com Research Team | Posted On Friday, March 06,2020, 04:12 PM

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Mistakes to Avoid While Investing in Mutual Funds

 

 

Over-time mutual funds have become the best investment option for investors to invest and create wealth. Investors are swayed by the way mutual funds work to help investors grow their money over time. Mutual funds are thus absolute favourite among both seasoned and new investors. So, if you are planning to invest or have already invested in mutual funds these are some of the common mistakes you must avoid:

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Mistakes to Avoid While Investing in Mutual Funds

Investments Not Aligning with Financial Goals:

Investors in India are often swayed towards investments either due to recommendations from friends or relatives or through advertisements. Instead of evaluating the aspects of the investment they end up making emotion-driven investments. Thus most often they lose money as their investments do not align with their financial goals.  

Thus while investing in mutual funds; the primary mistake investors should avoid is making investments that do not align with their financial goals. You must use the mutual fund scheme to fulfil your future goals and thus allocate your finances accordingly.

Unrealistic Expectations:

Mutual funds are investment options that do not offer guarantees returns. Returns from mutual funds can be generated by compounding and rupee cost averaging.

However, there is a common perception among investors that mutual funds are a guaranteed way to generate very high returns. Thus while picking up a mutual fund scheme, no one can actually predict the amount of returns it will give. The returns entirely depend on how the scheme rides the share market fluctuation and company-specific factors.

See Also: How Mutual Funds Work?

Lack of Risk Assessment:

People investing in mutual funds most often get lured by the fact that mutual funds can provide high returns. Thus investors end up making huge investments without assessing the amount of risk they are eligible to take.

An investor must not make investments in a hurry. It is important to make investments only after conducting proper research and assessing your risk-bearing ability. Understanding the amount of risk you can take will allow you to choose a fund that is suitable for your profile. Thus if you are a risk-averse investor, you can park most of your investments in debt funds with a little equity exposure to minimize your losses. Similarly, you must also assess your investment horizon which will again help you to balance your risk and returns. For example, if you have a short investment horizon, you can increase your risk exposure to gain high returns else you can park the majority of your funds in debt instruments with the remaining amount in equities.

Investing with a Short-Term View in Mind:

Just like a sapling planted today will need time to grow into a plant, a mutual fund scheme also needs time to grow. You must invest in mutual funds not just for the sake of investing. But you must invest keeping a long-investment horizon in mind. An investment horizon of 7 years and above gives ample time for your mutual funds to grow. This way you can avoid loss of capital, as the ride on equity becomes smooth and volatility is evened out in the long-term.

See Also: Mutual Funds with High Returns

Not Reviewing the Investments:

Just like other investments, mutual funds too require some degree of revision from time to time. Financial advisors always ask the mutual fund investors to keep a check on the performance of the funds to make the necessary and informed changes on time. Not doing so is one of the most common investment mistake mutual fund investors make. The regular reviewing of investments helps you to understand the up and downs of the market and serves as an indicator to make timely adjustments of the funds.

The Investor’s and the Financial Advisors Objective Do Not Meet:

Make sure to take guidance from your financial advisor while investing in a mutual fund scheme. A financial advisor can help you select the right investments schemes as per your risk-bearing ability and your financial goal while keeping in mind the investment timeline. Most investors try to experiment with mutual funds investments and leave the returns on luck instead of trying a systematic approach. Not seeking the advice of a financial advisor may lead you to heavy financial losses if you do not have a good understanding of such investments.

See Also: Which Type of Mutual Fund Is Best to Invest?

Investing Too Much in Mutual Funds:

While it is important to balance the risk and returns by diversifying your portfolio, you must ensure you do not park your entire savings in mutual funds. As an investor you must avoid certain pitfalls of mutual funds like investing all your money in one scheme that has high equity exposure, investing in multiple SIPs or investing in under-performing funds in your portfolio. If you want to remain on the safer side make sure to start with a small amount and gradually increase investments.

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