Mutual funds may be subject to market risks but you can stay a step ahead and lower your risk by avoiding some common mistakes.
Financial and investment wisdom does not come overnight, and with the ever-changing market like mutual funds, the stakes of making a mistake and losing your hard earned money are even higher. However, you can get optimal results by being aware and avoiding these five silly yet common investing mistakes.
1. Investing without a clear plan:
The most common mistake that mutual fund investors make is investing without any clear plan. What do you expect to achieve when the only reason you invested is that your friend or father or uncle told you that it is a good idea? If you do not know what your objective for a particular investment is, how are you going to prioritize your finances or decide what, how and where to invest? Keep in mind that contrary to the popular belief, investing in mutual funds is many things but a mere gamble.
If you know your needs, you can identify your financial goal and make an appropriate plan to meet those needs.
2. Not paying attention to asset allocation:
How often have you heard the saying, ‘Focus on one thing to succeed’? No matter what your answer is, mutual funds is one of the areas where this otherwise very wise saying does not stand true. If you invest exclusively in one asset or sector, you expose yourself to a higher risk ratio.
So, do not put all your eggs in one basket, instead make sure that your portfolio is a mixture of stocks, bonds and cash; diversify your mutual fund portfolio to balance your investment and risk profile.
3. Diversifying a little too much:
Remember, diversifying is not about having as many funds as possible but finding the right balance amongst categories to manage the risk of a probable underperforming one. Most people, in an attempt to diversify, end up investing in too many similar schemes in the same category. Now, if you buy, say, 10-12 stocks- that actually fall in the same category- in the name of diversification, you will inevitably lose capital if the value of that category goes down. Not only this, over-diversification jumbles up your portfolio and makes it unmanageable.
So, rather than investing in too many schemes, go for one scheme per category in accordance with your ultimate financial goals.
4. Panicking and redeeming prematurely:
What most people do is redeem their mutual fund investment as soon as the market crashes to save themselves from losing more money. However, all that does is give you short-term mental satisfaction. In a growing economy like India, every market has its own cyclic low and peak moments. Moreover, not only will you lose interest by redeeming your investment early but might also have to pay premature withdrawal penalty.
So, the best thing to do is be patient, as your market will likely recover from the lows and help you get better returns by the time you reach your financial goal.
5. Making frequent changes to your portfolio:
It is easy to get overly enthusiastic and reshuffling your portfolio based on the fund markets’ daily performance when redeeming is not an option. However, doing so will only increase your stress level and waste your time. A drop in fund rating does not necessarily mean that you made a bad investment. Note that mutual funds are relatively long investments, so you should review your portfolio’s performance relative to certain benchmarks and not the daily highs-and-lows.
Avoid these common mistakes people make while investing in order to get the best output. Keep in mind that mutual funds ought to be smart investments. You can easily meet your short as well as long-term financial goals by investing in a clever and disciplined manner.