If you have decided to invest in a mutual fund scheme, undoubtedly you have made a wise choice. Mutual fund investments help you to build a significant amount of wealth over time. However, it is important to avoid some common mistakes which can derail your investment strategy.
Now, we will discuss some of the common mistakes that you must avoid while investing in a mutual fund SIP. Read along to get further insights about the same.
10 Common Mistakes to Avoid
Here are some of the most common mistakes that you can avoid while investing in a mutual fund via SIP:
1. Investing Without Goals or Objectives
The first and foremost thing that you will require when investing in a mutual fund is a financial goal or objective. Investing without goals often leads to disorganised investments that are not sufficient for our future needs. That is why it’s necessary to have clear goals. This not only helps us maintain a disciplined investment strategy but also helps us in determining the right fund and investment duration.
2. Focussing Solely on Performances
Many of us solely chase the performance of a mutual fund scheme. However, you must know that performance is one of the key selection criteria and not the only one. This is mainly because past performance does not guarantee future returns; it merely indicates potential returns. Therefore, it's essential to consider several factors beyond historical performance while selecting a mutual fund scheme.
3. Overlooking Risk Tolerance
Many investors select mutual fund schemes without accessing their risk profile which can have negative financial consequences. Before investing in an SIP, determine your risk appetite/tolerance based on factors such as age, current financial status, objectives and time horizon.
Choose the right type of mutual fund whose risk level aligns with your tolerance. For example, invest in debt funds if you have a low risk appetite or hybrid funds if you have a moderate risk appetite.
4. Lack of Research
Sometimes, investors invest in popular mutual fund schemes without having proper knowledge about the particular scheme. Another related and dangerous mistake newbie investors make is to select schemes based on recommendations without conducting their own research.
It is always recommended that proper research is carried out as it helps us to get valuable insights. This includes understanding the scheme’s objectives, past performance, and associated risks, enabling investors to make informed decisions.
5. Not Reviewing Your Portfolio
Many investors have a perception that mutual fund SIPs don't need constant monitoring and review due to a misconception that all SIPs will perform well. However, that is a misconception since different SIP investments perform differently based on their portfolios. That is why constant monitoring is necessary.
Moreover, your financial status may change from time to time. For instance, your income might increase. In such a case, you can also increase your SIP amount, enabling you to accumulate your target corpus more quickly.
6. Panic Withdrawals
During market corrections, some investors simply redeem their Mutual Fund investments in panic situations. This is mainly because they fear that their principal investment might be eroded. However, we know that market ups and downs are quite natural.
This is the reason why it is always recommended to stay invested for a medium to longer duration. Over a longer timeframe, the stock market always tends to go up, enabling investors to make significant gains.
7. Trying to Time the Market
Many investors are constantly trying to time the market; perfect timing refers to investing when the markets are low and selling when the market is high. However, getting the timing right is not as easy as it seems to be. Therefore, investors can prefer starting a Systematic Investment Plan, which averages out the short-term volatility over time.
8. Heavily Investing in Sectoral Fund
The returns of a sectoral fund may seem too good to miss out on. However, this does not indicate that it will continue to generate the same return over a longer term. Therefore, having a major proportion of your investments in sectoral or thematic funds is not a wise decision to make,
Sectoral funds carry very high risks, even among equity funds. It is mainly because guessing which sector or theme will perform well is a bit of a challenge, and not everyone can get it right.
9. Investing in Equity for a Short Term
Another common mistake made by investors is that they invest in equity and equity-oriented mutual funds for a shorter horizon. Historically, equity mutual funds tend to perform better over a longer time frame, mainly because the impact of market volatility tends to average out over time. Therefore, if you have a short-term objective, consider investing in debt mutual funds, especially short-duration funds.
10. Ignoring the Track Record of the Fund Manager
The track record and experience of the fund manager play a crucial role in determining the performance of the mutual fund scheme. Checking the experience and qualifications of the fund manager can help you to get trust and assurance that your fund has the potential to perform well in the near future.
Conclusion
By avoiding the above-stated mistakes, you can make your mutual fund investment journey more fruitful. However, there are several other mistakes that we tend to make, which include investing in NFOs, selecting regular plans over direct, choosing the IDCW option overgrowth, etc. Learning about the best investment practices will eliminate such mistakes.
Consider carrying out thorough research on the chosen SIP scheme, including scheme objectives, level of risk, expense ratio, exit load, and fund manager's experience. Additionally, check several risk assessment ratios of the scheme such as alpha, beta, standard deviation etc., to make an informed decision.
