The stock market is on a bull run. India's benchmark indices, BSE Sensex and Nifty are at record highs. Nifty has crossed the 11,000 mark and Sensex has crossed the 36,000 mark. It's in these bullish times that you must be very careful. With stocks and equity mutual funds giving higher and higher returns, there are chances of making costly mistakes.
I will give you an idea of mutual fund investment mistakes you must avoid, in a stock market boom. Want to know more on mutual funds? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
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In a bull market, greed and complacency can cost you a lot of money. It's these simple mistakes you must avoid, to grow rich.
1. You invest in balanced funds for dividends
A balanced fund invests in a mix of debt and equity. It offers you the best of both Worlds. The equity component helps create wealth and the debt portion offers protection in a falling stock market. Many investors invest in balanced funds just to get tax free dividends. They use balanced funds as a regular source of dividend income.
Balanced funds want to tap more investors and have started offering monthly and quarterly dividends. These generous dividends are being paid out of the pile of money (distributable surplus), accumulated with the balanced fund. There's no guarantee that balanced funds will continue paying dividends.
If you want a regular source of income, invest in the growth plan of balanced funds. Then start a Systematic Withdrawal Plan (SWP) after a year. SWP is a service offered by mutual funds, that allow you to withdraw a specific amount of money at pre-determined time intervals like monthly, quarterly or even once a year.
2. Starting fresh SIPs for a very short time
Systematic Investment Plan popularly called SIP, is a method of investing in mutual funds. You invest small amounts of money regularly, say once each month or fortnight in the mutual fund. Today, stock markets are rising. If you start an SIP in an equity mutual fund when stock markets are at their peak, you need to continue SIPs for at least 5 years to get good returns.
Many investors started SIPs when markets were at their peak and exited the investment after 3 years. They suffered heavy losses. If you are starting SIPs when stock markets are at their peak, make sure to stay invested for long periods of time.
See also: What is Primary Market?
3. Plan Your time with SIP
There is a popular saying, Don't time the market. Spend time in the market. But, many smart investors stop SIPs when stock markets are rising or valuations are high or even book profits. These investors hope markets will correct and they could again start investing.
Investing only when stock markets are cheap, will rob you of great returns. You lose compounding benefits (return on return) on the accumulated money, and fall short of financial goals.
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4. Investing heavily in mid-cap and small-cap funds
Mid-cap and small-cap funds have beaten Multi-cap and Large-cap funds in recent times. Enormous returns have tempted you and other investors to rush to mid-cap and small-cap funds. This could be a bad mistake.
You and other investors invest in mid-cap and small-cap funds based only on past performance. Mid-cap and small-cap funds are very volatile and if stock markets crash or correct, you could lose a lot of money.
Many small-cap and mid-cap funds have restricted lump-sum investments in their schemes. DSP Blackrock Microcap, IDFC Focused Equity, SBI Small and Midcap, and L&T Emerging Business are some of the funds that have restricted lump-sum investments in their schemes.
If you have not invested in mid-cap and small-cap funds, don't rush into them. An investment in Large-cap and multi-cap funds are a safer investment.
Yes, stock markets are going up. Investing in equity mutual funds and stocks must be done very cautiously in these times. If you have knowledge of stock markets and time to research, go ahead and invest in equity mutual funds. Otherwise, take the help of a financial advisor rather than search for hot tips in magazines and newspapers. Be Wise, Get Rich.
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