Mutual Fund Investment Mistakes to Avoid During Market Volatility

Panic Selling

When markets fall, the NAV of your MF units falls and when that happens, investors tend to panic-sell their units. But remember one thing: if markets fall, they will recover, maybe not immediately, but they will recover. The falling NAV of MF units is a notional loss, which converts to a real loss when you redeem your mutual fund investments.

The key to creating long-term wealth is being patient when markets fall and enjoying the fruits of your patience once they recover.

Exhibit Herd Behaviour

Humans inherently have a herd mentality where they hesitate to go against the crowd. When markets fall, many investors redeem their investments, increasing your anxiety and causing you to do the same. Herd mentality is one of the most common behavioural biases and you should counter it by being rational and focused on your financial goals.

Stopping SIPs

When markets are falling, many investors stop their SIPs, assuming that if they buy more units, the NAV will fall further, incurring more losses. In fact, you should continue your SIPs to buy more units at lower prices at the same cost. SIP helps you utilize the market’s volatility to your advantage through rupee cost averaging.

Continue your SIPs regardless of the prevailing market volatility to get better returns over the investment duration.

Following Random Tips

When markets are down, everyone panics and misinformation spreads. On social media, self-proclaimed “Finance Gurus” spread bogus information and make doomsday predictions, instilling fear and panic in investors. Unfortunately, many fall prey to this and redeem their investments, incurring a loss.

Pay no heed to such baseless rumors and random tips, and make investment decisions based on credible information. You can also consult your financial advisor or an expert before making any investment decisions.

Investing Based on Market Volatility

One common mistake investors make is investing based on market highs and lows. If the market rises, they increase their investment and should it fall, they stop investing. Long-term wealth isn’t created by timing the market but by staying in the market.

Volatility should be of least concern to long-term investors. The markets fall and recover, and that's their pattern, but over the long term, markets have steadily risen.

Not Diversifying Your Investments

Putting all your eggs in one basket increases your risk. Multiple assets have an inverse relationship with each other. For example, when yields on bonds rise, stock prices fall as many investors switch to bonds to get higher returns with less risk compared to equities.

Maintain a diversified portfolio and adjust asset allocation as per market conditions so that if one sector or market falls, the other rises, balancing your portfolio.

Not Waiting for the Market to Recover

Understand the difference between volatility and loss of capital. Volatility refers to the fluctuations in securities prices and may last for an extended period. But price volatility causes a loss only when you redeem your investments. However, if you stay invested, the markets will recover, growing your investments over the long period.