STAY ALERT! 8 Pitfalls to avoid while investing in Mutual Funds
Mutual Funds may be beneficial, but risks can come in disguise.
HERE ARE 8 PITFALLS YOU SHOULD WATCH OUT FOR:
TAKING WRONG CALLS One of the biggest mistakes is a wrong judgement call. Ensure your MFs meet your investment strategy and financial goals. Otherwise, the money won’t work for you.
FOLLOWING THE HERD Your friend or relative recommended A SINGLE FUND Unless you really need a secondary an MF and you promptly invested without any research? What if it does not meet your brief? Avoid following blind recommendations. Only you know your true requirements.
NOT GETTING THE RIGHT ADVICE Unfortunately, you may come across people who mis-sell investment products. You can avoid this pitfall by: a) Opting for the right financial advisor, b) Asking enough questions to determine if the recommendation is right.
INVESTING A SINGLE FUND Yes, MFs are inherently diversified, but that does not mean you invest in a single Fund. You should always diversify further by investing in a mix of Equity, Debt and Balanced Funds.
HALTING INVESTMENTS WHEN MARKETS FALL Panic is an investor’s worst enemy. If you did your due research and trust your analysis, then don’t stop investing or sell in a panic. There will always be rough times. Consider these as opportunities.
DIVIDENDS OVER GROWTH Unless you really need a secondary source of income, it’s best to reinvest your dividends. Buy additional MF units using this money. This is the way you compound your returns in the long term. If your goal is to grow capital in the long run, opting for the dividend option will end up eating away the accumulated profit at regular intervals. This will have a negative impact on your path to wealth creation as your profits won’t be reinvested.
NOT LETTING GO OF UNDERPERFORMERS Patience is good, but don’t be too patient with the losers. Get rid of the underperformers. Your financial advisor can help you with this task if you are sure whether to wait or sell.
TIMELY REVIEW Many investors have learnt to invest regularly in the market, but only a few of them regularly track their investment performance. Timely reviewing the performance of your fund would keep you aligned with your investment goals. Weed out the funds that are not giving good returns as compared to their peers. But critical point is that investors should give ample time to their mutual fund to grow. Ideally, a time frame upwards of a year should be given to a fund to earn decent returns.
