7 Mistakes to avoid while investing in Mutual Funds
Mutual Funds have amassed considerable popularity in a very short span of time given the ease of investing and the returns it can generate. One of its unique features is its suitability to, and inclusion of a diverse investor pool. This financial instrument creates a playing field where investors belonging to every level of economic strata can partake in wealth creation.
While it is clear that investing in mutual funds have been made easy and accessible, there are a few mistakes that many investors, both new and old, tend to make. Here are some common mistakes that you can avoid while investing in mutual funds.
1. Investing Without a Purpose
Having a goal and investing towards it ensures that you stay the course of the investment till you achieve your target. Unplanned investments and those without a purpose can lead to investing in funds that may not be best suited to your investment needs.
2. Investing in Too Many Funds
When the range of fund offerings is consistently on the rise, it is but human to digress from your goal and want to include as many funds in your portfolio. This however isn’t a smart move. Having too many schemes in your portfolio can cause the erosion of returns due to overlapping. Hence, stick to rule 1 — Invest with purpose — and limit your choices to say 3 to 5 schemes.
3. Trying to Time the Market
A lot of investors try to time the market in an attempt to maximize the return on investments. What most people don’t realise is that it is not as much about timing the market as it is about sticking to one’s investment horizon that gives the optimum results. An attempt at timing the market is not only stressful but it also increases the risk of losses. In fact, one of the best ways to invest is via a systematic investment plan (SIP) where a certain sum is invested at frequent intervals in a mutual fund. Over the course of time, the market highs and lows are neutralised to give you optimum returns.
4. Stopping or Pausing Your SIPs Suddenly
The idea of starting an SIP is to imbibe a disciplined investing habit while also contributing regularly towards building a corpus. Unplanned and sudden exits from your investment is not just detrimental to you achieving your goals but also indicates lack of planning and commitment. Staying committed to the course of the investment horizon on the other hand helps boost your portfolio returns.
5. Ignoring your Risk profile
This is often one of the most common mistakes many investors find themselves making and repeating. Mutual funds are subject to market risk, hence, one must first determine how much risk they are tolerant towards before investing. Depending on your risk tolerance you can make investments that give you returns in line with your risk profile . When you invest without taking your risk profile into account you subject yourself to panic and anxiety which could eventually lead to sudden exits during market swings.
6. Putting all your Eggs in One Basket
As old as this idiom is, the relevance of it resonates loud and clear in the context of mutual fund investing. No matter what your risk profile, never invest all your money in one mutual fund as it increases your exposure to risk manifold. It is advised to allocate your investments across different types of mutual funds to lower firm-related risks and earn higher returns.
7. Not Investing Enough
Let’s face it, you invest to create enough wealth that would meet certain goals. On this note, it is important to realise that investing the bare minimum would only lead to a certain level of wealth accumulation taking into account factors like inflation, etc. It is therefore recommended that you step-up your SIPs gradually as this will lead to higher wealth accumulation.
Investing in mutual funds is not difficult and at the same time can deliver the optimum results if you refrain from making these small mistakes when investing. The process of choosing the right fund based on your risk profile is made simpler still with the free risk assessment available on the Paytm Money. You can also select the most appropriate investing options from the various investments packs on the app.
Investing is easy, staying committed and calm is what stands the test of trying times. Invest mindfully and reap the rewards of your patience and discipline.
