Mutual Funds: Mastering A Flawless Investment Decision

We are products of our past, but we don't have to be prisoners of it.” Investors are human beings and human beings make mistakes. Investors should learn from their mistakes, and should never repeat it.

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investment decisionWe are products of our past, but we don’t have to be prisoners of it.” Investors are human beings and human beings make mistakes. Investors should learn from their mistakes, and should never repeat it.  There are multiple mistakes which mutual fund investors make. If you are a novice investor or somebody who has been losing money, by investing than you need to focus on some common mistakes, which investors make.

Indian equity market has seen a bull run over past few years and Indian investors are pouring money in mutual funds like never before with Equities receiving the most significant share. Let’s find out the mistakes Indian investors make while investing in mutual funds and what can be the disciplined approach to invest in the mutual funds. The following are the thirteen commonly made mistakes investors make while investing in the mutual fund market.

TURNING A BLIND EYE TOWARDS YOUR FINANCIAL GOAL

  • Investment into mutual funds or any other financial instrument should satisfy your financial goal. But, a total disregard for the financial goal while making an investment decision can crush your dreams. Investing without a goal is akin to crossing a busy road blindfolded.
  • An investor can get a big blow of his life if his investment decision is taken which does not fulfill his personal financial goals. If you have to pay 50000 rupees every year as your child’s fees and you manage to save only 3000 a month, then its better to invest in recurring deposits rather than equity mutual fund. Investment in equity mutual fund is highly risky and may result in losses at the end, which the investor cannot afford.

TURNING A DEAF EAR TOWARDS ‘TIMING RISKS’

  • There is no dearth of investors who invest a significant corpus of their funds all at once in a mutual fund. These investors redeem their investments when markets appear bullish or wait for market correction, before they can invest money. Later, these investors regret selling their investment at lower NAVs or buying investments at higher NAVs.
  • Investors can avoid such kind of timing risks by merely investing into mutual fund schemes via systematic investment plans or SIPs. Using SIP as a mode of investment and holding the investment for a long term can be the best strategy to invest in mutual funds.

mutual fundsFUNDS ‘PERFORMANCE’ AS FOCAL POINT OF INVESTMENT

  • Investors have the notion that the past performance of the fund should be treated as the basis of their investment because they believe that a fund’s past performance is the reflection of the fund’s future performance, which is not true. Past performance of a mutual fund can be a matter of luck. Past performance can also depend on the former fund manager who may have now quit or market conditions that existed earlier. Investors should know the working of the mutual funds and not just the past numbers, before investing.

OVERDIVERSIFICATION : INVESTING IN TOO MANY SCHEMES

  • Too many cooks spoil the broth. Investing in multiple mutual fund schemes can be the worst decision. Investors should note that Diversified Equity Mutual funds are schemes where the investment is done in diverse sectors and stocks. Investment in multiple schemes will only make the life of the investor difficult because he won’t be able to track all those schemes. It would be an apt decision to invest in not more than 3-4 schemes spread over various categories like Large, Mid and Small Cap funds.

DESERTING INVESTMENTS MIDWAY

  • Patience is the key to success in the world of Equity investment, and only those who have a time horizon for at least 3-5 years can make money. Some investors tend to make an emotional or abrupt decision. They generally get scared at the volatility of the equity market and tend to pull out of the scheme. Investors should invest in mutual funds for a long term and should not get scared away with interim losses.

PAYING NO HEED TO RISK APPETITE

  • The investment decision of the individual should focus on his risk appetite. Investors generally get carried away under peer pressure, or they happen to take such decision abruptly without giving heed to their risk appetite. One should strictly stick to his risk profile when it comes to some investment decision.

IGNORING FUND REVIEW

  • Investors have the tendency of not reviewing their fund performance. Such ignorance may cost the investors a bomb. Investors should timely make a review of their portfolio and should weed out the underperforming funds.

CHASING FUNDS WITH HIGH DIVIDENDS

  • Some investors are lured by the fact that some mutual funds especially the balanced funds are paying high dividends. But with the imposition of 10 % dividend distribution tax on equity oriented mutual funds have made these mutual funds unappealing. However, there are some mutual funds who still give good returns as dividends. Investors also have an illusion that dividends are some sort of extra returns on your mutual fund investments, however, these dividends are scooped out of your own fund which decreases the net asset value.

ASSUMING BALANCED FUNDS AS REGULAR INCOME PRODUCT

  • It is another misconception that exists in the mind of the investors, where they consider balanced funds as a regular income product. A balanced fund is similar to an equity fund and is highly volatile and risky, where income is not guaranteed. Only when an investor has a long term scenario, he or she will succeed in making money.

DISREGARDING CREDIT RISK, DURATION RISK, AND HIGH EXPENSE RATIO

  • Debt fund should be an essential instrument in a person’s portfolio. It can be a profitable instrument but there are interest rate risks, credit risks and high expense ratio associated with these funds. Debt funds are sensitive to these risks and expense ratio and investors should understand these risks before investing in a mutual fund.

COMPARING NAVs OF TWO FUNDS

  • Investors should also avoid considering NAV as a parameter for comparison between two funds. NAV and the number of units an investor holds are irrelevant when it comes to identifying the performance of the fund. However, NAV of a fund can be compared with earlier NAV of the same fund to calculate the returns of the fund. Comparing the NAVs of two separate funds will only make the life of the investor miserable because then the investor will make random investing decision. Random and abrupt decisions should be avoided or else the investor can get a rude shock of life in the end.

FUNDS WITH CHEAPER NAV ARE BETTER” IS A SERIOUS MISCONCEPTION

  • Many people have the habit of buying cheap items. A novice investor can be easily tricked or misguided by others in buying funds with cheaper NAVs. An investor should know the fact that there is no thumb rule regarding the low or high NAVs. In fact, low or high NAV is immaterial in choosing the fund.

IGNORING COSTS

  • Exorbitant costs can eat the profits associated with your investments. Investors should consider the commercial interest of the advisor before investing. They should instead opt for an investment with low costs. Investors can also invest in ETF which are low cost investment option.

A wise decision regarding mutual fund investment would bring in good returns to the investor. An investor should remember the fact that there are two things which matters the most in the mutual fund investment and therefore an investor should ask two questions before investing:

  • What are the financial instruments and sectors where Mutual Fund is investing?
  • Who is the fund manager and how is he or she investing?

The need of the hour is that the investor should avoid the above mentioned mistakes if they want to make money from mutual funds. The decision should not be taken in haste. It should be a rational decision and not an emotional one. The investor should first identify his financial goal, draw a financial plan with the help of experts and then structure or restructure his portfolio.

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