What are the most common mistakes that lead to poor portfolio performance? Do you also need to reconsider your investment strategy? Find out below.
Mutual funds can prove to be one of the best investment options with highly profitable returns for minimal initial investment if done correctly. However, if you are afraid to invest due to the pertaining dogma, it is best you know the whole truth. Having said that, here are the 8 common reasons behind a non-performing mutual fund portfolio:
- Not giving enough time
One of the most common mistakes investors make is giving too much importance to the mutual fund’s immediate history and thus selecting the wrong funds. It is crucial to understand that mutual funds need sufficient time to perform. The best course of action is to take a look at the fund’s 3 to 5-year performance-instead of meagre past 3 to 6 months- in order to unbiasedly weigh its endurance during various market cycles.
- Pausing investments when the market falls
Mutual fund market is very uncertain. Even if you have chosen the best funds with a great past record, they are subject to poor performance in adverse situations. However, market ups and downs are cyclic; if you pause your investments during one cycle, you risk losing potential compounding benefit on the accumulated amount and timely completion of your financial goal.
- Timing the Market
Another common reason why your mutual fund portfolio may seem to be underperforming is that one keep trying to time the market and waiting for funds to perform. Keep in mind that profitable investment requires time and patience- and lots of it. If you keep trying to time the market, the only thing you will gain is stress.
- Following the herd
Choosing fund types based on their current value or schemes that have worked for others instead of your own financial goals is another common mistake. Not having a pre-set goal in mind can lead to poor decisions in terms of policy, contribution, portfolio diversification, and commitment. Whereas, if you prioritize your goals, you will have a clear vision of where to invest, how much to invest and for how long.
- Unrealistic expectations
Many a time, investors expect the same returns and profits as someone else they know did by copying their exact strategy. It is imperative to know that interest rate environment and stock market values are never the same, so expecting the same result as someone reaped a few years ago- without considering the present scenarios- is unrealistic and absurd.
- Opting for dividend over growth option
While dividend funds do seem like a good source of regular passive income, there is no complete guarantee that they can sustain the payout quantum in the long run. Instead of getting a steady income and guaranteed return as per your needs, your payout is more likely to deflect with every market fluctuation.
- Lack of Periodic review of Portfolio
The mutual fund industry is hugely affected by the government and business policies. Even one small change may require you to review and re-align your portfolio. However, if you are unaware of the changes in government and industry policies, budget announcements, and the dynamic business environment, you are likely to miss the chance to make timely and necessary changes and suffer poor portfolio performance.
- The credibility of Wealth Manager
Make sure that your asset management company assigns you a dedicated wealth manager with good credibility and past performance. The Wealth manager plays an important role in designing your investment portfolio, if he gives you incompetent advice or shows poor management, it will ultimately lead to poor or low returns.
Keep these points in mind and make sure you have a right mix of assets. If you overexpose yourself to a certain scheme or invest in a single fund rather than properly diversifying and allocating your assets, your portfolio is more likely to underperform and give poor returns.
Lastly, remember that market up and downs are standard and absolutely no reason to go into the panic mode. Just keep your goals clear and expectations realistic.