Mutual fund investments are becoming increasingly popular among retail investors in India, and for good reason too. Given the different types of mutual funds available in the market, there is always something for every kind of investor. Whether you are a risk-taker or a risk-averse investor, whether you want to invest for the short-term, medium-term or the long-term, and whether you want to save taxes or create wealth, you’re sure to find a mutual fund scheme that meets your specific investment needs.
But before you invest in mutual funds online, there are some key things you should be aware of. More specifically, you need to know what mistakes mutual fund investors generally tend to make. That way, you can ensure that you avoid these pitfalls and make the most of your mutual funds.
There have been thousands of mutual fund investors before you, and there will be thousands after. Naturally, given how prone to error human judgement is, there are bound to be some mistakes that most investors may be guilty of.
Check out the most common areas where mutual fund investors tend to falter - whether they are new to the market or seasoned players.
Before you invest in any asset or scheme, you need to know the ins and outs of that investment option. This is particularly more crucial in the case of mutual funds, because there are so many different kinds of schemes available in the market to choose from.
Whether it is based on the type of assets they invest in, the nature of redemption, the tenure of investment or the risk and the investment objectives, the variety of mutual funds is significantly high. There are also different fees and charges that you should know about before you buy mutual funds online. Not to mention the aspects of taxation that you need to understand.
So, going in without doing adequate research is a common but costly mistake you should avoid.
Different mutual funds have different investment objectives and characteristics. Some are geared towards long-term investors, but others may have a shorter investment duration. Some, like equity funds, may give you the opportunity to create wealth, but others, like debt funds, may give you fixed returns.
If you invest without any goal in mind, your financial goals may remain unfulfilled. Worse still, you may not have a clear idea about what to do with your investment returns, and this may lead to mismanagement of your gains.
This is why it is important to align your mutual fund investments with your financial goals. For instance, if you want to invest for a specific goal like buying your dream home in the next 5 years, you can buy mutual funds that have an investment horizon of 3 to 5 years.
Timing the market is essentially about figuring out the ‘right’ time to enter the market and exit it. The problem with this practice is that there is no ‘right’ time, since you cannot predict how the market will move in the future.
So, if you have a lump sum amount and decide to invest in mutual funds online when the market dips, you may assume that it will rise in the near future. But what if the market continues to be bearish? In that case, you will make a loss on your investment.
A Systematic Investment Plan (SIP) is a better idea. Mutual fund SIP investments help you avoid the costly mistake of trying to time the market. Here, you can invest small sums of money periodically in the mutual funds of your choice. And over time, even as market volatility continues to exist, your investment cost averages out.
This is a complex mistake that has two worrying aspects. The first is herd mentality, which involves blindly following what other investors are doing. The second aspect is investing on an impulse, without taking an objective view of why you are buying a particular mutual fund. Similarly, selling in panic mode if the market is falling is another common and related mistake.
Together, both these mistakes can make you lose a lot of capital over time. The best way to avoid this mistake is to have a clear investment plan about when to buy and when to sell. Alternatively, you can rely on mutual fund SIP investments to overcome the urge to buy impulsively.
Lastly, ignoring your risk profile can prove to be very detrimental to your finances over time. Invest in mutual funds according to the level of risk you are willing to take as well as the level of risk you can afford to take.
There are mutual funds for every kind of risk profile - whether you are a risk-taker, a moderate investor or a conservative investor. So, make sure that you only choose mutual funds that are aligned with your risk tolerance and risk appetite.
Well, now that you know the 5 common mistakes made by mutual fund investors, you can steer clear of these pitfalls. Make sure you keep the above pointers in mind before you buy mutual funds online. All you need to get started is a demat account and a good investment plan.
If you don’t have a demat account yet, you can simply get in touch with Motilal Oswal and open a demat account in just a few minutes. The best part? You can open your demat account for free and start your mutual fund SIP investments right away.
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