Top 5 Mistakes New Investors Make with Mutual Funds (and How to Avoid Them)
by Admin
For the new investors in India mutual fund is one of the most appropriate means to build up wealth. But as is the case with most other pursuits in life, it is not exactly a smooth ride. First-time investors are especially prone to such errors, which are easily avoidable if one knows about them in advance. If you’re new to investment, be careful of these pet mistakes that new investors often make and how to avoid them.
1. Lack of Research
Mistake:
Therefore, failing to research before investing in mutual fund is one of the biggest mistakes people make. Instead, most investors are driven by gossips or attractive advertisements, which may not entail a suitable investment plan for them.
How to Avoid:
In any investment, it is wise to go for fund that meets his/her investment objective, risk and expense ratio. For instance, if investing on equity funds, then it is fitting to make an investment based on the fund’s past performance for at least five years. Such tools as Mutual Funds Screener on IpoTec assist users to compare certain funds like for instance SBI Bluechip Fund, Axis Long Term Equity Fund, and HDFC Mid-Cap Opportunities Fund so that an investor can make sound decision on which one to invest it
2. Ignoring Fund Costs
Mistake:
Apart from the expense ratios and fees attached to them, there are normally effects on overall returns when they are overlooked. These costs can lead to the reduction of your profit margin, both on a short and on a long term basis.
How to Avoid:
Each exchange traded fund has its own expense ratio and other charges so it is recommended to look at this before investing. ‘It doesn’t matter that one is great and the other simply good’ Even a small difference can turn into much bigger one in the future. For instance, expenses on equity funds can be more than expenses on debt funds in a fund industry. Below is a comparison of some popular funds:Below is a comparison of some popular funds:
| Fund Name | Expense Ratio | Category |
|---|---|---|
| Axis Bluechip Fund | 1.67% | Equity - Large Cap |
| ICICI Prudential Balanced Advantage Fund | 1.49% | Hybrid |
| SBI Magnum Ultra Short Duration Fund | 0.43% | Debt |
Please refer to our AMC page where the cost of these funds has been compiled in a way that you can easily select your preferred products based on your investment time-frame and risk tolerance
3. Short-Term Focus
Mistake:
Thinking that funds must deliver fast profit and often changing investment portfolio might result in further losses and in missing potential accumulation of gains.
How to Avoid:
The stocks endorsed by mutual funds are long-term investments in the stock market Most of the indexes of mutual funds are long-term investments. The best principle to manage the fund involves keeping one engaged and allow the money to compound. For instance, long-term funds such as the Mirae Asset Emerging Bluechip Fund have generated handsome absolute returns but the same would not be evident if the fund was redeemed midway through the period. Check our Mutual Funds Screener to separate the consistent performers from the unconvincing ones.
4. Not Diversifying
Mistake:
Investing in all your portfolio in a single fund or asset class means you are a higher risk. It is disastrous if your portfolio was not well-diversified when a given market is volatile.
How to Avoid:
Hedge is an important factor in risk dealing. It is essential that any portfolio of investment shall contain equity and debt securities and other hybrid securities. For instance:
| Portfolio Mix | Allocation (%) | Example Funds |
|---|---|---|
| Equity | 60% | Axis Bluechip Fund, Mirae Asset Hybrid Equity Fund |
| Debt | 30% | SBI Magnum Ultra Short Duration Fund |
| Hybrid | 10% | ICICI Prudential Balanced Advantage Fund |
You can you use our Screener to identify the correct portion you need to invest in.
5. Ignoring Risk Tolerance
Mistake:
High-risk funds, for instance, can be catastrophic if bought with little to no reference to risk tolerance; during a downturn, the holder panics and sells off unprofitably.
How to Avoid:
To aid in choosing your funds, it is important that you carry out a preliminary evaluation of your risk tolerance level. If you are conservative investor, it is better to go for debt or the blended funds rather than pure equity funds. For instance, if you are more inclined towards stability then SBI Magnum Constant Maturity Fund or HDFC Corporate Bond Fund is a better choice for you. Go to our AMC page to check out money managers depending on your risk tolerance.
Conclusion
Mutual funds offer you one of the best strategies to increase your wealth but there are pitfalls that you must avoid. Hence, effective research, bearing the mutual fund cost in mind, strategic long-term thinking, diversification in mutual fund investment and understanding the risk tolerance level will help to move confidently in the field of mutual fund.
Take advantage of what is offered at IpoTec to help one make the right decisions with aim of building a strong financial base.
Disclaimer: This information given in the blog is for knowledge only and it is strongly advised not to consider this as the financial advice. Please remember that the information here should not be taken as direct investment advice and always seek professional advice.