A lot of people are switching to mutual fund investors because of the transparency that they offer. Earlier, people were skeptical about investing in mutual funds as they didn’t have much information about, they work. This problem seems to have faded away in the information age as now almost every single detail about mutual funds, their fund managers, CAGR, past performance, etc. is freely available and easily accessible to everyone. But even today, first time investors make a lot of common mistakes while investing in mutual funds and aren’t able to churn out any decent returns from their investments.
Here are some of the common mistakes which mutual fund investors either make before or after investing in these market linked schemes –
Investing without having any specific goals
Investors can identify a mutual fund scheme that can offer them decent capital appreciation, but if they aren’t able to target any specific goals with their investments then it is as good as shooting in the dark. Mutual fund investors who are investing with a specific goal like retirement corpus, corpus for their dream home, or for securing their child’s future, are more likely to find success with investing. Having a clear perspective on how much corpus and goals you want to target with this investment will help you remain committed to their goals.
Investing without knowing how much wealth they want to create
What happens with several investors is that they start investing in mutual funds, but they aren’t sure about how much corpus they want to build at the end of their investment journey. Remember that if you do not invest adequately throughout your investment journey, you may not succeed in accumulated the desired corpus.
Making a lumpsum investment instead of starting a SIP
Retail investors can invest in mutual funds either via lumpsum or through a Systematic Investment Plan (SIP). A Systematic Investment Plan or SIP is a simple and convenient way of ensuring that investors save and invest small sums at regular intervals in mutual funds. This way they can buy more units over the long term and reduce their average cost of purchase. Now it is possible to invest in mutual funds with a monthly sum of Rs. 500 and investors no longer need to have surplus capital to start investing. Investors may also make the most out of a free online tool like the SIP calculator which calculates the total returns (approximate) which one can fetch at the end of their investment journey. Investing in mutual funds via SIP may also lead to investors benefiting from the power of compounding.
Investing without determining one’s risk appetite
Mutual funds like equity funds do hold the potential to generate decent returns over the long term, but that doesn’t mean these schemes guarantee returns. People fail to understand that equity funds expose their entire mutual fund portfolio to market volatility and such a scheme can even generate negative returns in the short run. Investors who let emotions get in the way of their decision making process often sell their mutual fund units when the scheme is underperforming to avert any further losses. What they do not understand is that markets do not remain volatile forever, they eventually become normal and deliver over the long term. Hence, one must only invest in mutual funds depending on their risk tolerance.
Opting for the regular plan over direct plan
Regular plans have commission fees which the fund house recovers by levying a high expense ratio. This is why investors should always opt for a direct plan instead of investing in a regular plan.