5 Mistakes Not To Be Made While Investing In Mutual Funds

When it comes to investing our hard earned money, we want be aware and cautious of what we are doing and what is to be done to make the best decisions. But many times in this endeavour of ours we tend to make unpardonable mistakes that cost us a lot in the future and hurt our money. (read myths about mutual funds busted)

Here are 5 mistakes that you must not do while investing in mutual funds:

1. Waiting for the right time
   Mutual fund investments or any investment in the markets are subject to a lot of economic, social and political pressures from around the world. And as such no moment is a good time or a bad time unless it becomes a moment of the past. The sheer lack of unpredictability makes determining the right time impossible for a mutual fund investment. Moreover, long term investors (5-7years) need not worry about entering the market at the right time because over the span of the investment, markets are going to see the ups and the downs and at the end the downs are going to be balanced by rewarding ups. A rational investor would opt for a SIP (read what is a SIP) where in the investor makes a regular investment while reducing the risk of loss in investment value and still reaping average returns of around 12%.
   
2. Investing all money at a time
   As discussed above, it is very difficult to define the best time to make an investment because the definition of “good time” keeps changing every moment. And given this understanding, investing all the money at a time in a mutual fund can harm the invested money in case a downfall in the economy follows soon after the investment is made. We cannot foretell the ups and downs that are in store. Hence, again the best and safest option would be to opt for a mutual fund SIP after researching a few funds and seeing their past performances and management skills. (read 20 things to consider while investing in a mutual fund)
   
3. Diversifying too much
   All of us have heard “Do not put all your eggs in the same basket”. This is relevant to investments as well. Yes, it is important to stay invested in equity, debt and hybrid but only after ascertaining the objectives of and expectations from the investment. Just picking tens of schemes and investing in each of them so as to reduce the risk of losses is a foolish decision. Firstly, an investor should realise that he is paying annual charges on each of his mutual fund schemes. Secondly, he should understand that investing in 10 different schemes but all of the same equity or debt or hybrid or sector based will lead him nowhere. If an investor has a low risk taking capacity but still wants to see substantial returns on the investments rather than diversifying in a haphazard manner he must look to invest in a well managed and good performing MF scheme for a long period of time.
   
4. Panicking and redeeming your mutual fund investments
   It is a human tendency that once he has invested money he will try his best to keep a track of how the markets are moving, how the economic situation in the country and abroad is, how any new regulation would affect the investment and so on and so forth. A less informed and an irrational investor would panic once he comes across a negative piece of news or believes the rumours that are circulated on any mass media platform. Staying invested at such times is the wisest decision to make if he is investing in a mutual fund SIP. Mutual fund SIPs have a feature of averaging out the ups and downs and compensating for the same and yet providing a decent return of investment. And long term investors of any type of mutual fund should never opt to redeem their investment at such times because it is the rule of the market and economy to stabilise and grow over the long term, thus nullifying any losses. (read mistakes people do while investing in mutual funds)
   
5. Going only by past performances and or star-ranks
   Although an investor must look at the past performance of a mutual fund scheme before choosing to invest in it, going just by the past performance is a huge mistake. That means what an investor must look for is a scheme that may or may not be the best star-rated or the best performing scheme of its category, but also see how the scheme has performed when the economy has seen the ups and downs that we have been talking about. He must also see the expense ratio, the entry and exit charges (read what is a expense ratio and entry & exit load). He should also pay heed to how the other mutual fund schemes under the same AMC are performing. He should look at the risk involved in the mutual fund schemes he is looking at and see if they match his risk appetite. Lastly, he must see if taxes under one category of mutual funds are eating too much into his returns.

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