By investing in mutual funds, investors have an opportunity to earn, over a period through the power of long-term compounding. Investing in mutual funds does not always guarantee high returns. In India, investors regularly invest in mutual fund schemes through Systematic Investment Plan (SIP) accounts. There are over 2.5 crore SIP accounts in India.
Though investment in mutual funds are on the rise, most people do not know what they are doing wrong during and after investment. An undisciplined approach towards investment and very little knowledge are some the reasons why high returns are not guaranteed.
Some of the mistakes that investors should avoid while choosing mutual funds for building wealth are:
1. Investing in too many schemes
This is a very common mistake made by investors. By doing this, investors think they are diversifying the portfolio It is important to invest in mutual funds that offer exposure in the market. While investing in many schemes can diversify your portfolio, the hassle of tracking the investments increases. Building a portfolio that consists of few well-managed plans and keeping a track of the investments is vital. There is also a risk of over-diversification if you invest in too many mutual funds. This usually happens when investors grow impatient over a period of time and start investing in many mutual fund schemes.
2. Investing all your money at once
This is a common mistake made by novice investors. It is not a good idea to invest a large sum of your money in one place. Investing all their money at once will hamper their ability to meet emergency money requirements. This hampers their ability to meet emergency money requirements. If the investor loses on his main source of income, it would take 1-3 business days for immediate redemption of funds to be converted into hard cash. Also, exit loads may be applicable. Ideally, it is better to keep six months of emergency savings in the bank before investing in any mutual funds.
3. Doing a timely review
Even if you regularly invest in the markets, it is important to always keep a track of the performance of investments regularly. Reviewing the fund performance on a regular basis will keep you aligned with your investment goals. In the long run, it also helps in avoiding obstacles to your creation of wealth. In case there are funds in your portfolio that are not doing well, doing a review regularly will help you get rid of them. It is vital that investors give a good amount of time for their mutual funds to grow. For decent returns, it is important for funds to be given at least a year’s time to grow.
4. Timing the market
Trying to time the market is one of the biggest mistakes made by investors while investing. Even though equity assets are patchy in the short term, they generate huge returns in the long term. Investors tend to overlook valuations and other downsides when chasing a stock that is already rallying. Therefore, holding your investment for at least 5 years is important when investing in an equity-oriented mutual fund. Choosing a Systematic Investment Plan will not only help your money grow, but also helps in investing in a disciplined manner.
5. Risk profile is ignored
Investors tend to invest in risky avenues and ignore their risk profile when investing in a market in which share prices are rising. It is important to stick to your risk profile and asset allocation if the main goal for you is saving.
6. Focus on asset allocation
The proportion in which you invest in various assets is called asset allocation. Financial goals, risk appetite, and the investment duration are the primary determinants of your asset allocation. It is important that the investor diversifies the portfolio across asset classes adequately while investing. Gold, equity, real estate, and fixed income are some of the classes that investments can be diversified across. Your hard-earned money is at risk if it is not diversified across funds adequately.
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7. Don’t change investment plan, stick to long term plans
Creation of wealth not only requires the right set of securities but also having to go through the ups and downs of the markets patiently. It is important not to make hasty decisions that are not aligned with your investment plan. Thinking over your financial goals in detail will help in choosing the best investment plan. This also helps in reaching your financial goal. During times of market volatility, investing through SIP will help. Changing your investment plan according to the current market is not recommended.
8. Choosing mutual funds on the advice of friends and family
It is always important to taking the advice of an expert when it comes to financial matters. Blindly investing in mutual funds based on their star ratings is risky. It is important to check the parameters the rating agency has considered. It is also not advisable to take the recommendation of family and friends.
9. Betting on sector fund
This is one of the riskiest choices that can be made by an investor. There is always the risk of sudden reversal when betting on a sector. The returns on Pharmaceutical funds were fabulous a few years back but have fallen out of favour due to a host of issues. Investors who had invested in pharma are facing losses. Therefore, investing in diversified equity opportunities funds is important.
Additionally, it is important that investors investigate the past performance and scheme details before making a choice of investing in mutual funds. It is also important that investors keep reviewing their portfolio on a regular basis even after investment. This not only helps in checking the performance and pattern of their investment, but also helps in achieving their financial goal and creating wealth on the long-run.