Personal Finance

7 Mutual Fund Mistakes To Avoid During Investing3 min read

January 29, 2020
Mistakes to avoid

7 Mutual Fund Mistakes To Avoid During Investing3 min read

Mutual Funds have amassed significant acceptance among retail investors on account of its ease of investing and the returns potential. One of its unique features pertains to its ability to suit a diverse investor pool. This financial instrument creates a favourable arena wherein investors belonging to different risk profiles can participate in wealth creation. While it is evident that investing in mutual funds has been made simple and accessible, there are a few mistakes that many investors, both new and experienced, tend to make. Here are a few common mutual fund mistakes that you can avoid during investing.

1. Investing Without a Purpose

Having goal-backed investments ensures that you stay focused and committed until you achieve your target. Unplanned investments and those without a purpose can lead to investing in funds that may not meet your investment needs in an optimum manner.

2. Investing in Too Many Funds

When you come across a wide range of fund offerings, it is but human to drift away from your main goal and want to include as many funds in your portfolio. This, however, isn’t a wise decision. Investing in too many schemes can lead to erosion of returns due to the effect of overlapping. Thus, it would be better to invest with purpose and limit your choices to say 3 to 5 schemes.

3. Trying to Time the Market

Many investors try to time the market in an attempt to boost their return on investments. What most people don’t realise is that sticking to one’s investment horizon is more important than timing the market to get the optimum results. Trying to time the market is not only stressful but it also increases the risk of losing money. In fact, one of the best ways to invest is via a systematic investment plan (SIP) where a specific amount is invested at frequent time periods 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 intention to start an SIP is to imbibe the habit of disciplined saving while also contributing regularly towards creating wealth. Unplanned and sudden exits from your investment not only make you lose precious returns but also indicates a lack of focus and commitment. Staying committed to the course of the investment horizon, on the other hand, helps to maximize your portfolio returns.

5. Ignoring your Risk profile

This is often one of the most common mutual fund mistakes that many investors commit and repeat. Mutual funds are market-linked instruments, thus, you need to first determine your risk tolerance before investing. Based on your risk tolerance you can make investments that give you optimum risk-adjusted returns. When you invest without considering your risk profile, you subject yourself to panic and anxiety which might result in sudden redemptions during market swings.

6. Putting all your Eggs in One Basket

No matter what your risk tolerance is, never invest all your money in one mutual fund as it exposes you to a high risk of loss. You may instead, create a diversified portfolio wherein you allocate your money in 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 generate adequate wealth that would meet certain goals. On this note, it is important to realise that investing the bare minimum may not create enough wealth that is appropriate to achieve goals taking into account factors like inflation, etc. Thus, it is important for you to step-up your SIPs gradually as this may result in higher wealth accumulation.

Investing in mutual funds may help you to earn the maximum returns if you refrain from making these small mutual fund mistakes at the time of investing. To invest based on your risk profile, you may take a free risk assessment available on the Paytm Money. You can also select the most appropriate investment options from the various investment packs on the app.

Investing is simple, staying committed and composed is what stands the test of trying times. Invest mindfully and enjoy the benefits of your patience and discipline.