Avoid These Mistakes To Get The Best From Mutual Funds
Mutual funds are fast emerging as ideal investment options that have the potential to ensure that investors have enough money at every stage of their life. However, this can happen only if one understands every aspect of mutual fund investing and follows the right process for investing in them. Making common mistakes while investing in MFs can cost investors dearly as it can either result in taking higher risk or lower returns and hence compromise some of the important investment goals in life.
Here are some of the mistakes committed by investors and how to avoid them:
Ignoring asset allocation while investing in MFs : Mutual funds allow investors to invest in different asset classes through a variety of funds. However, investors often end up investing haphazardly without ascertaining the right mix of asset classes in the portfolio. This approach either makes portfolios very aggressive, taking tHaving too many funds in the portfolio-It is quite common to see investors owninga number of funds thinking that it wouldprovide them higherhem beyond their accepted level of risk, or very conservative, resulting in negative real rate of return, i.e. gross return minus taxes and inflation. In reality, asset allocation is important as it determines the level of risk and what to expect in terms of returns. The right way to decide asset allocation is to consider the time horizon and investment goals. While equities and equity-related funds should be the mainstay for long term goals, balanced funds can be ideal for medium term and debt funds for short term goals. Equating mutual funds with equity- Many investors either stay away from mutual funds completely thinking that they invest only in equity market or restrict their investments to equity funds alone. Although the awareness about various mutual fund schemes has improved considerably over the last few years, many investors still equate them with equities. In reality, investors can invest in different asset classes through them and earn healthy returns over different time periods. Therefore, investors must make MFs an integral part of their entire portfolio.
Having too many funds in the portfolio– It is quite common to see investors owning a number of funds thinking that it would provide them higher level of diversification and protection from risks. In reality, having an over-diversifed portfolio makes it difficult to track performance of funds and invariably non-performing funds pull down the overall portfolio return. Therefore, one must build a compact portfolio consisting of a few well-selected funds in each asset class to benefit from their true potential.
Relying on balanced funds for regular dividend– Balanced funds are a great option for those investors who may like to invest a significant part of their investment in equity for growth and the rest in debt to provide some stability. These funds also offer regular dividend, i.e. monthly, quarterly and yearly. Ideally, investors with dual objective of earning dividend and growth from their investments and havethe capacity to withstand the volatility of these funds should opt for the dividend option. However, investing in these funds aggressively to generate income can result in inconsistency and that can cause anxiety to investors during market volatility. Therefore, combine these funds in the right proportion with other options, depending on your risk-taking ability andincome requirement.
Being obsessed with past performance– Investing in mutual funds is often perceived as simple as selecting a few top performing ones and making them a part of the portfolio. No doubt, past performance is an important criterion in the fund selection process. However, relying on short term performance alone can backfire and cause disappointment as top performing funds keep changing every quarter. So, investors must look beyond performance and consider factors like suitability in terms of risk profile and time horizon and opt for funds that have consistent performance track record.
Not aligning SIPs to goals– Investing in a disciplined manner through Systematic Investment Plan (SIP) is a powerful mechanism as it allows investors to not only save regularly but also tackle volatility while investing in equity and equityoriented balanced funds. However, it is often seen that investors start investing through SIP without having a defined time horizon and that makes it difficult for them to continue this process every time the market turns volatile. However, aligning investments through SIP to goals makes it possible for investors to stay focused through their defined time horizon. For example, an investor will not make an abrupt decision to stop SIP if it is aligned to his/her child’s education.
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