Don’t Make These 10 Mutual Fund Mistakes When Investing

Most investors are intelligent people; they indicate enough financial wisdom when it comes to making a purchase or saving on one. When it comes to Investing, they tend to make a lot of mistakes— To the extent, they get it so wrong that their actions tend to not only consume wealth, they also instill a sense of disbelief and mistrust with investing, leading to staying off from investing for indeterminate periods. Analysis of stock market movement and the time when investors enter these markets indicates that most investors enter markets when they go up, and with the first indication of a fall, they do a hasty exit.

Furthermore, many a time investments are placed based on factors like year-end tax savings, a friendly tip, and so on. It can mean people are investing without considering the facts or why they are investing. In the below post, we will explore common mutual fund mistakes made by investors and how by avoiding them you can be a winner.

With so much emphasis given in investing, investors cannot afford to keep repeating actions that could have critical negative outcomes for their financial goals. The problem with many investors is that while they know that they have made investment mistakes, and promise not to repeat them, most people have only the faintest sense of what those mutual fund mistakes were, or, more importantly, why & how they made them. The way out to be successful with investing is by understanding what the mistakes are and when one tends to make them.

10 Mistakes to Avoid When Investing in Mutual Funds

1. Stopping SIPs when markets fall

The flexibility of investing in mutual funds is many times misused by way of stopping investments in them, especially the Systematic Investment Plans. The biggest advantage of investing through SIPs in mutual funds is that this method lets you control emotions when investing. Furthermore, just the way we follow a cycle when it comes to earning by way of monthly income, SIPs allow you to observe an investment timeline with regular and timely investments.

Mutual fund mistakes to avoid

Don’t Stop SIP Investments (Credit – Investor Funda)

Further, when it comes to SIPs, market fall and rise evens out over time for you to average your investments. So, when the markets fall, you buy more mutual fund units, and when markets rise, you buy lesser units. This way, you average out the investing cost over the time, without being affected by markets up & down movements. Do not make the mistake of stopping your SIPs; just stay invested to get the benefit of SIPs over time.

2. Panicking in the times of market corrections

During the market corrections, the average investor starts selling mutual fund units & shares during the market downturn thinking their money will be lost forever, on the other side, smart investors know how to hold their investments in a volatile market and stay invested for long-term.

Mutual fund mistakes to avoid

Do Not Panic During Corrections (Image Courtesy – Invesco Mutual Fund)

Each investment comes with its risks and a fitting investment time frame for which the instrument is suited to invest in. As an investor, you should understand that the short-term market movement is irrelevant. As long as your investment time frame remains the same and the instrument (shares or mutual funds) in which you are investing follows its mandate, you should not worry.

It is important to stay invested for the long-term and diversification of your investments which is what works over time. So, do not panic in times of market correction and up-down swings— the mantra to be a successful investor is to stay invested through market cycles.

3. Trying to time the market

When it comes to investing, many people say, “buy low and sell high,” but sometimes this saying seems over-analyzed and chased. However, to chase the day when the markets are low to invest and exit on the day they are on top is a statistical exercise which is rarely possible.

Mutual fund mistakes to avoid

Don’t Time The Market (Image Courtesy – Invesco MutualFund)

In reality, it is difficult to time the market all the time. A tiny fraction of investors has been successful and consistent over stock market cycles. It is for the same reason; more money has been lost by people while trying to time the market. Preferably, investors should invest regularly through mutual fund SIPs so as to average their investment cost over long-term. See my detailed post on What Is The Best Time To Invest In Mutual Fund.

4. Holding too many mutual funds schemes

Diversification is very important while investing but it is often confusing, and instead of spreading investments across different asset classes, many investors tend to diversify in numbers and land up doing is to invest in many mutual fund schemes where a few would do the trick.

Instead of investing in 12-15 different fund schemes, follow the asset allocation that works for you. That way, investing in even one good fund scheme will be enough. It has known that asset allocation is fundamentally responsible for portfolio performance than individual stock or fund selection. It is for this reason that asset allocation is the key to portfolio returns and hence is of eminent importance.

The other difficulty with holding too many mutual fund schemes is that they are difficult to track and review. Moreover, the collective impact of their performance also gets difficult to evaluate. So choose only 4-5 best schemes which will follow a proper asset allocation.

5. Letting your heart rule your head

The natural tendency among most investors is to exit the markets as they are unable to deal with the falling markets. Moreover, they start investing as soon as the markets start rising. Both these strategies for mutual fund investing are wrong. To any of your investment you should not get emotionally attached.

Mutual fund mistakes to avoid

Don’t Let Your Heart Rule Your Head (Image Courtesy – Invesco Mutual Fund)

The fact is we actually don’t know what tomorrow will happen. But one thing that one should completely believe is that when investing in mutual funds or equity markets, everyone should do it for the long-term. Yes, stock markets are affected by short-term disturbances (like Fed meetings, war threats, some government announcements) but in the long-term, they are the winner. Although there could be changes in your life’s events and financial goals, market movements should not push you to make radical changes. By holding your emotions in control, you will have a fair idea of how an investment will fare eventually. Remember to let go of your emotions when it comes to investing and not let your emotions affect investing decisions.

6. Investing without assessing the fund’s performance

Do not be carried away by every new fund scheme which is on offer at 10 per unit. When it comes to investing in mutual funds, there are is a lot to choose from, and the right way to address this is by searching the open options and zeroing down on a fund scheme with a good track record and history.
Select a mutual fund that clearly states its investment objectives. Apart from past performance, know the scheme’s investment philosophy and how efficiently the fund scheme sticks to its stated objective.

Mutual fund mistakes to avoid

Don’t Invest Without Evaluation of Mutual Fund Performance (Image Courtesy – Invesco Mutual Fund)

Apart from returns, understand how much assets the fund manages and for how long fund manager is managing a fund. Monitor for the fund’s performance compared to its peers and benchmark during both market highs and lows. This way you will get a bigger picture of how the fund does during various phases of market cycles.

7. Adopting trading strategies

As a mutual fund investor, you should not apply trading strategies. For example, if a fund is purchased through a lump sum, then a fall in the market may provide an opportunity to average. That being said, it is important to have patience and follow a disciplined investment approach (like SIP) besides keeping a long-term picture in mind and as said above, not to panic in event of market corrections. Also, market corrections give the opportunity to fund managers to pick best quality stocks at a good valuation.

8. Delaying investing

There is an old saying “Procrastination is the thief of time”. When it comes to investing, for most investors, getting started is the hardest part. Investing is not anymore a big task once you get started. That said, investors shouldn’t wait for too long because implementing investments should begin promptly. If you don’t start investing immediately, you are going to miss all the opportunities that various financial assets provide. Also, by investing late, one misses the power of compounding on their investments.

One of the best ways to invest is through SIP. Investing in SIP can help you attain your financial goals by taking benefit of rupee cost averaging, and growing your investments by compounded benefits. One of the major advantages of investing through SIPs is that it helps in disciplining an investor, along with inculcating a habit of “forced savings.” One of the most important concepts in finance is that money has the “time value”. That is to say that money in hand today is worth more than money that is expected to be received in the near future.

Mutual fund mistakes to avoid

Don’t Delay Investing (Image Courtesy – Invesco Mutual Fund)

The thumb rule is to invest regularly and keep reinvesting the returns. With the power of compounding, one can have notable returns in the long run. With simple interest, one can earn interest only on the principal whereas, with compounding, one can earn interest on the principal and additionally on the interest.

9. Undermining the risk

The risk is an indispensable part of investments. The risk in regards to investments refers to not only the chance of losing one’s capital but also the possibility of getting less than expected returns from an investment. When it comes to investments, risk has two essences—the risk with the financial instruments and your judgment of risk. For instance, at a younger age, investors will be more risk-taking than when they get old.

The lesson for you is that when investing, risks are unavoidable. However, risk can be managed to suit your investment objectives. One way to manage risk is to classify investments into different baskets and choose an investment option properly. There are investment options like bank deposits (FD) that are in with risk, compared to, say, investing in a thematic fund (Infrastructure, Technology, Pharmacy etc.) that invests in a particular theme or sector.

One of the advantages of investing in mutual funds is that the risk inherent in every fund scheme is indicated with the Riskometer (from low to high, with three variants within), which you will get with Scheme Information Document (SID).

10. Sticking to underperforming funds

Investing in funds is not a one-time action of picking a fund scheme to invest in. To be on top of your finances, you should periodically observe the performance of the schemes you invest in. Example fund can underperform temporarily when the markets fall; another if it continues to perform poorly compared to the peers as well as its benchmark.

Mutual fund mistakes to avoid

Don’t Stick To Under-performers (Image Courtesy – Invesco Mutual Fund)

When the fund starts to underperform, don’t be directed by emotions to stay invested. Evaluate the performance of the fund scheme you invest in at least once a year. This way, you will have the discipline to track its performance and evaluate how it has fared. Such a review gives you the option to consider staying or exiting the fund scheme due to lack of performance.

Conclusion –

If you are unable to determine the performance of fund scheme to decide to stay invested in it or exiting it, take the help of your advisor to know what you should do next about staying invested or redeeming your investment.

I am not connected to Invesco Mutual fund in any way. This post is for education purpose only and not an advice to invest in the same fund.

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