Avoid These 7 Common Mistakes Mutual Fund Investors Make for Better Returns.
Mutual funds have become one of the most preferred investment avenues for Indian investors. When done right, mutual funds offer good inflation-beating returns and help fulfil long-term wealth accumulation goals. However, novice mutual fund investors often make mistakes that compromise their earning potential. In this article, we highlight the common mistakes mutual fund investors make to help you avoid them.
Let’s take a look at the 7 common mistakes mutual fund investors make:
When it comes to mutual fund investments, reviewing the historical performance of a fund is crucial for investors. While this review serves as a good yardstick measure, investors need to understand that past performance does not guarantee future returns. Many mutual fund investors make the mistake of assuming a fund will keep replicating its past performance to offer similar returns. This assumption can result in disappointment as fund performance varies depending on market conditions, revisions in interest rates, and changes in its investment strategy. Therefore, it is always recommended to select funds based on your investment objective and risk tolerance capacity.
Most retail mutual fund investors also make the mistake of making emotionally-charged investment decisions. Market swings can cause panic among investors, forcing them to make impulsive buy and sell decisions. For instance, many MF investors pause or withdraw from their SIP investments during market down-turns. However, doing so can be harmful since markets tend to recover over the long-run. Exiting before recovery compromises your yield potential.
One of the most common mistakes mutual fund investors make is to invest without a well-defined goal or financial plan. Your investment goals and objectives underpin your investment strategy, helping you select mutual fund schemes that best align with them. In simple words, your goal determines your asset allocation. Each fund has a unique goal be in income generation, wealth creation, or sector-specific exposure. If you ignore your financial goals and invest blindly, you might end up investing in mutual funds that don’t suit your needs.
Investors often adopt the ‘invest and forget’ strategy for mutual funds. This can be one of the most critical mistakes a mutual fund investor can make. Market fluctuations can cause the asset allocation of your MF portfolio to move away from the original mix, increasing your risk exposure. Similarly, some funds may have performed well in the past, but now offer declining returns as compared to their peers. It is advisable to review and rebalance your portfolio at least once a year to avoid sudden shocks and weed out funds that are consistently underperforming.
Another common mistake mutual fund investors make is to blindly imitate the investment strategy of others. Sometimes MF investors may read success stories of other investors and decide to follow their investment strategies as a blueprint in the hopes of achieving similar returns. For inexperienced investors, these strategies and approaches can seem like a guaranteed path to success. While there is nothing wrong in imitating other experienced investors, you should not forget to factor in your own risk tolerance capacity and goals. These subjective factors can play a significant role in altering outcomes of even similar investment strategies.
Most MF schemes offer two options to investors, namely, the growth and dividend option. The growth option reinvests returns into the fund, while the dividend option pays the investor a regular income. Mutual fund investors make the mistake of choosing this dividend option over the growth one. Opting for the dividend plan hampers the compounding power of your investment since the returns don’t get auto-reinvested. If you already have a source of regular income and prioritise saving for long-term goals, the growth option is the better alternative.
Investors often harbour unrealistic expectations from their mutual fund investments. They expect high returns in the short-term applying the stock investing logic to MFs. While certain MF schemes are designed for short-term goals and offer good returns, they still require patience from investors. Many mutual fund investors make the mistake of abandoning their investment when MFs fail to offer overnight returns like pure stock investments. In other words, they engage in the buying and selling of MFs akin to stock trading, clocking losses.
Avoiding these 7 mistakes mutual fund investors make can help you master the art of wealth accumulation and skip the pitfalls of these market-linked investments. Investing according to your financial goals, keeping emotions at bay, customising your asset allocation as per your risk tolerance, and rebalancing your portfolio periodically aids in optimising returns and minimising risks.
If you haven’t started your MF investment journey yet, head to the Bajaj Finserv Mutual Fund Platform today. Here, you can compare 1000+ mutual fund schemes and curate a customised portfolio in no time. You can even estimate returns using our free Mutual Fund Calculator tool to fine-tune your financial plan.
One of the biggest mistakes a mutual fund investor can make is to invest without understanding the product. Remember to research the fund and understand it well before investing to avoid this mistake.
Some of the common investment mistakes include not acknowledging your risk tolerance, investing without understanding the product, redeeming too early, and opting for dividends over growth.
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