Mutual fund investments can be an excellent tool to build a well-diversified investment portfolio and achieve various financial goals. Whether you are a high-risk or risk-averse investor, aim to save taxes or build a corpus, or plan to invest for the short term or the long term, there is a mutual fund scheme that meets your specific investment goals.
However, even the most experienced investors are not immune to making mistakes that can jeopardise their total returns. On that note, here are the six most crucial mistakes that investors tend to make when investing in mutual funds and strategies to avoid them.
1. Not diversifying your portfolio
Many investors fail to diversify their portfolios by following proper allocation approaches. However, portfolio diversification is one of the core investing principles as it helps spread out your risk and reduce losses.
For example, if you only invest in one mutual fund that invests in stocks, and the stock market crashes, your investment will suffer. However, if you have a diversified portfolio that includes several asset classes, such as equity, debt, gold, etc., then you may recover quickly if one particular investment loses value.
2. Chasing performance
Investing in a mutual fund that has outperformed the market in recent years may seem tempting. However, remember that past performance is not necessarily indicative of future results, and chasing top performers can often lead to buying high and selling low.
Therefore, investing a large sum of money in such a fund can be risky. If the fund’s performance suddenly declines, you could lose a significant amount of money. A better approach is to choose quality funds that cover different asset classes and sectors.
3. Not paying attention to fees
When you invest in mutual funds, you will incur fees such as expense ratio. These fees can eat into your investment returns over time, so paying attention to them is important. When choosing a mutual fund, read the fund’s prospectus carefully and try to find one with low fees to keep more of your investment returns.
4. Not understanding your risk profile
Avoid investing in mutual funds simply based on projected returns and understand your risk profile instead. For example, equity funds are often more volatile than debt funds; however, these funds often have the potential to offer higher returns over the long term. Hence, if you are risk averse, debt funds are preferable because while they may offer lower returns, they are comparatively more stable.
5. Not monitoring investments
Investing in mutual funds is not a set-it-and-forget-it proposition. You must monitor your investments regularly to ensure they are still performing well and meeting your goals. Over time, if a particular fund does not perform well, don’t be afraid to sell it and reinvest your money elsewhere carefully.
6. Reacting to short-term market fluctuations
When the stock market crashes, many investors think of selling all their investments and getting out while they still have some money left. However, this is usually not a good idea since the market typically recovers over time. If you sell during a market crash, you will likely miss out on the rebound when the market eventually recovers.
When it comes to mutual fund investment, even a small mistake can cost you a lot. So, make sure you keep the above pointers in mind before investing in mutual funds. These tips will help you make smart investment choices and ensure you don’t lose out on potential profits.