7 mistakes to avoid when investing in mutual funds
Upstox
3 min read • Updated: February 24, 2024, 4:13 PM
Summary
Mutual funds are a popular choice when considering investments. If you’ve decided to invest in them, you’ve made the right choice. MFs are a great avenue for wealth generation and can potentially deliver results that overtake inflation. However, like other investment options, mutual funds are subject to risks. Moreover, many investors bear the brunt of mistakes and sinkholes they wish they knew about before investing. If there is one question that pops into every investor's mind it is - ‘Am I making the right call’. Let's look at a few common mistakes investors make and how you can bypass them.
1. Ignoring the charges
The annual percentage charged for managing the fund is called its expense ratio, and it can have a big impact on your returns over time. Try to find funds with lower fees by comparing the expense ratios of various funds in the same category. Small fee differences can make a big difference over time.
2. Only looking at historical results
When it comes to mutual funds, past performance doesn't always predict future outcomes. Choosing funds only on the basis of their historical performance could leave you disappointed because fund strategies and market circumstances change. Instead, pay attention to the risk profile, and current investing philosophy of the fund.
3. Disregarding goals
Each fund has a unique goal, such as income, growth, or sector-specific exposure. Make sure your overall investment goals and the fund's objectives are in line. Diversifying across funds with different objectives can help build a well-rounded portfolio.
Investing emotionally
It might be harmful to respond to market swings with frantic selling or rash purchases. Create a long-term investing strategy and follow it; don't make rash judgements depending on the state of the market in the near term.
Overlooking risk tolerance
Not understanding your risk tolerance can lead to choosing the wrong funds. Aggressively chasing high returns with high-risk funds can be disastrous if your risk appetite is conservative. Assess your risk comfort zone and invest in funds aligned with it, considering factors like age, financial goals, and investment horizon.
Forgetting to rebalance your portfolio
Market fluctuations might cause a portfolio's asset allocation to stray over time. It is advisable to rebalance your portfolio often to preserve the asset allocation you have chosen and to efficiently control risk.
Imitating other investors
Quite often, after reading an impactful book by a prosperous investor, or speaking with friends that have gotten good returns, people feel the need to copy an investment approach. Since he/she has had success with mutual funds, others invest similarly. While there's nothing wrong with following a proper path, investing in mutual funds might have several drawbacks if it's not done according to one's own risk tolerance and investment style. What worked for them may not always work for you.
Conclusion
Make the most of your mutual fund investments by avoiding these common traps. After making an investment in a certain mutual fund scheme, you need to periodically review its performance and give your investments enough time to yielding the right results.