Common mistakes to avoid while doing Mutual Fund Investments

Everybody wants to make investment in mutual funds for peaceful returns. However, most of the investors, who are otherwise happy with the wafer thin margins also, are shockingly disappointed to see their money sinking. Recently there was an article in a leading financial newspaper, about how only 9000 investors out of 3.9 lakh total investors have been able to benefit from mutual fund schemes. That is a miniscule 2.3 percentage of the total investors in our country!!!

What is even more surprising is that even after selecting the right mutual fund schemes, which can give enormous returns, investors have taken actions which have resulted in overall losses in their portfolios.

Here is the analysis of some common mistakes, which investors should avoid :-

Mistake 1 – Wrong Timing:

The prime reason for not getting the benefit from the mutual fund investments is a euphoric entry into the market and a panicked exit. As per SEBI, AMFI data, huge money inflows happened whenever the markets scaled to new highs (for ex: 1999 and 2008) and large number of redemption happened during the stagnated phases of the market (for ex: 2001 and 2013).

Mistake 2 – Changing the funds too soon:

Changing the funds too soon, when it is not figuring in the top performing list. One should understand that it is no rule that the top performing fund for this year, will remain the top performing fund next year also. One should see the consistent record of a fund over a period of 5 years atleast. If you are changing funds too often then you are actually spending a lot of money on exit loads.(not to forget the tax implications as well.)

Mistake 3 – Short term outlook:

Investing for a short term hurts the investor. Investing for a shorter time frame puts you at a disadvantage, as you cannot make use of the fact that the longer you invest in the market, the higher are the chances of making good returns. The fact is markets are volatile. The only “safer” way to make money is to stay invested for a long term. Then the question is what is long term and short term ? It is actually quite simple. In our view, Long term is anything beyond 5 years period and short term is anything lesser than 5 years.

Our Advice to Investors

Investor must understand how the Mutual fund investments work. Once the investor has done the due diligence in choosing a scheme, then, what is needed is to trust the rationale and philosophy of the fund manager and wait patiently through the market’s peaks / bottoms, instead of juggling with the investment. The key to successful returns in Mutual Fund Investments is to do the homework before investing and then wait patiently.

The two important questions which will still remain are:

a) Have I done enough homework to invest in a mutual fund scheme with confidence ?

b) How do I ensure that my timing is not wrong ?

Both questions can be addressed effectively once you have clearly identified your financial objectives. Professional guidance is essential to evaluate your risk profile and create a personalized financial plan that aligns with your goals. Regular investments through SIPs, combined with a well-diversified portfolio tailored to your objectives, can help you avoid emotional decisions and stay focused on your long-term vision. Additionally, periodic monitoring and rebalancing will ensure your investments remain aligned with your goals and adapt to changing market conditions.

NB : Since, the time horizon required for a mutual fund to give desired results is long, we suggest one should always seek professional guidance in selecting the mutual funds.