Common Mistakes investors should avoid before investing into Mutual Funds
Mutual funds are associated with markets and are subject to market risks. There is no expected guarantee of returns on mutual funds; these are not assured return products. The last 5 years earnings shown by mutual funds is just indicative and it doesn’t assure same returns in upcoming years, even debt funds can be risky if there asset allocation is bad.
Searching for funds with Lower NAV
- Investing in mutual funds looking at lower NAV, NAV just reflects the unit value of a portfolio.Whether you buy fund with NAV of Rs. 12 or NAV of Rs.120 it doesn’t really matters, the thing only matters is quality of its portfolio and asset allocation. So keenly focus on quality of Mutual fund you want to invest in.
Selection of fund on the basis of its given return in past
In case a fund has given return of 15% while the other in same category has given a return of 13%, you might want to go for fund who has given 15% return in past but look at the reality, may be the fund have taken higher risk as compared to other and in future this higher risk taking technique may make it vulnerable to market risks and leading capital erosion.
Random selection of funds
Do not select funds randomly. Use your goals for selection of funds. For example for short term goals with period less than 2-3 years you can select debt fund as they will have higher returns as compared to equity ones while if you are having long term goals say for 10 years then equity funds will be best choice for you. So select funds according to your Goals and objectives.
Risk of Non Diversification
The ultimate benefits of mutual funds is there diversification as they invest in large number of securities, if you start judging the mutual funds like Banking funds or IT funds then you are only concentrating your risks, you should focus and go for diversified funds like large cap funds, index funds and muti cap funds.
Ignoring the Taxation part on Return
You should calculate your returns post taxation, any capital gain STCG/LTCG on returns from mutual funds should be accounted for. You can read how to calculate tax on mutual fund by clicking here : Taxation of Gains on Mutual funds
Lumpsum Investment in one Shot
Do not just shoot your money in a mutual fund in a single go. Go for monthly investment through Systematic investment plans (SIP) which can help you in getting better priced funds and averaging your costs. SIP helps you selecting a fixed time for investment every month with financial discipline in investment.
Non Reviewing Portfolio Health
Reviewing your mutual fund health, don’t just leave your mutual fund on its own, check it up regularly according to your risk appetite, re-balance it according to need of the hour and your goals and liabilities after all its your hard earned money.
- Example you have 50% Equity, 30% Govt Bond and 20% Corporate Bonds in your portfolio and your equity investment zooms to 60% of your portfolio, now its time to re-balance, sell some of your winning stock funds and use them to buy more in Bonds to re-balance your portfolio.
Investment after watching Television
- Do not just buy after getting investment advise from television but believe me no one can predict a market, what will happen in future its uncertain even Warren Buffett got wrong recently predicting the market.
Do your own study before investing in anything, there is no financial adviser better than yourself.