Mutual funds are increasingly gaining acceptance among investors due to their convenience, diversification and professional management. According to AMFI data, as of July 31, equity schemes received record inflows of net ₹20,742.77 crores in July, a 350% jump from ₹4,608.75 crores in June.
However, it’s important to understand the common mistakes that investors make before investing into a new mutual fund or ETF.
- Investing without a goal: Your investing decision needs to suit your investment goal. Solely investing without understanding the relevance of the mutual fund to achieve your financial objectives is the first mistake investors make. You cannot base your decision based on your friend’s or relative’s recommendations.
For instance, investing in tax-saving instruments generally fits within the investor’s investment goals. Investment in Equity Linked Savings Schemes (ELSS) need not be restricted to tax savings only and can be a part of the diversified equity portfolio to achieve long-term goals such as child’s education or retirement. It is imperative to have a clear direction and have an investment plan and stick to it.
- Making short-term profits: You should avoid investment in into mutual funds to reap short-term profits. Unless you are nearing your financial goals, you should not sell your mutual fund units. Mutual fund is meant for long term wealth creation.
- Over diversification: One of the biggest mistakes made by investors is to invest in too many funds. This may be more relevant due to the proliferation of NFOs by mutual funds. You need to evaluate whether the NFO is investing in a sector or market cap in which you already have exposure. Through this diversification, investors end up buying similar funds, which can be counterproductive.
- Timing the market: Timing the market could be detrimental to your financial journey. Investing through SIP (Systematic Investment Plan) helps you average your investment cost during market ups and downs.
Note: The table is for illustrative purposes only. Investments through SIP are subject to market risk and do not assure a profit or returns or protection against a loss in a downturn market.
Chasing Lower NAV for making profits: This is a common misperception among investors that lower NAV (Net Asset Value) has the probability of giving higher returns. But, in reality, that’s not correct.
Suppose you invest Rs. 10,000 in Fund A at Rs 20 per unit and Rs. 10,000 in Fund B at Rs. 50 per unit. Assuming both the funds appreciated by 10%. Let’s see this example to see which is more profitable.
As we see in the example above, the lower NAV of Fund A did not have any difference in the mutual fund units.
- Chasing top-performing mutual fund schemes: Investors are always looking for the best mutual funds in and top performing mutual funds. But one needs to remember that the performance keep changing all the time over the short term. The top performer of today may not be among the top performers of tomorrow. You need to assess the performance across market cycles and in comparison with peers and the benchmark. You can also use risk parameters such as Sharpe and Sortino Ratio to evaluate the potential for risk-adjusted returns. Read our recent post on Risk measures in mutual funds for more information. It may be better to go for a fund that has potential to minimize the downside risk better than go for a fund which boasts of high returns and taking high risks at the same time.
- Selecting a scheme without proper information: Evaluate the primary three key documents; Key Information Memorandum (KIM), Scheme Information Document (SID) and Statement of Additional Information (SAI) that helps you evaluate the investment objective, portfolio composition, primary holdings and percentage, fund manager details, expense ratio and much more. Investing without assessing this background information can lead to a mismatch between your risk profile and the scheme’s intended risk parameters.
- Stopping SIP when markets are down: Mutual funds offer the option of easy liquidity, but that doesn’t mean that you need to stop SIPs when markets are down. Many AMCs offer the option of pausing SIPs for a month or two and then gradually resume when things are favorable.
Let’s consider this hypothetical example of investor Ajay who has a goal of saving for his retirement.
Assume he has availed of an SIP option of investing Rs.2000 per month at an assumed rate of return of 10%. He has three choices: CONTINUE, PAUSE, or REDEEM his SIP.
Note: The table is for illustrative purposes only. Investments through SIP are subject to market risk and do not assure a profit or returns or protection against a loss in a downturn market.
If Ajay needs funds, he should PAUSE further contributions to the SIP, however, stay invested to the extent possible, so that he is able to grow his wealth for future goals.
These are a few of the necessary factors you need to check before you invest. Then, once you have aligned your objectives, keep a long-term horizon, and invest after due diligence.
Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.