Avoid these mistakes when choosing the best mutual funds

Avoid these mistakes when choosing the best mutual funds

by 5paisa Research Team Last Updated: Dec 11, 2022 - 02:06 am 21.1k Views

Mistakes in picking the finest funds might lead to regret. We've outlined a few blunders to avoid when looking for the greatest MFs. 

Mutual fund investors have a common propensity to constantly wish to be in the top mutual fund. However, doing so and picking the best mutual fund is a difficult undertaking.

This is not a one-time activity; therefore, you cannot invest in a single fund indefinitely. You should assess and review your mutual fund portfolio at least once a year.

In this post, we have highlighted a few pitfalls to avoid while choosing the finest mutual funds for your portfolio.

Invest cautiously in a New Fund Offer

The New Fund Offer (NFO) is similar to the Initial Public Offering (IPO) in mutual funds. Both, however, are very distinct from one another. The company does an IPO to obtain funds from the general public to finance its operations.

NFO, on the other hand, is used to aggregate money from individuals with comparable investing goals. You don't know anything about the fund while dealing with an NFO.

In the event of an IPO, you have a great deal of information at your disposal to make an informed investment decision. As a result, it is best to avoid NFOs that have nothing fresh to offer in terms of diversifying your investment portfolio.  

Do not rely just on star ratings

Mutual fund investors have a very erroneous view of star ratings. According to investors, the greater the star rating, the better the fund.

However, several studies have shown that because these star ratings are based on previous performance, they do not indicate a fund's ability to succeed in the future. As a result, don't make the mistake of assessing a fund just on its star rating.

Avoid holding too many funds

People frequently retain too many funds, especially those in the same category, in the mistaken idea that they are diversifying their investments. To be honest, the average person only requires 8 to 10 funds in his portfolio.

To diversify between Asset Management Companies (AMC), you do not need to invest in more than two funds per category, nor do you need to invest in every category accessible.

You don't gain the benefit of diversification at a certain point. Furthermore, it would exacerbate the confusion and make it uncontrollable. As a result, it is always preferable to stick to your financial objectives. This makes managing your mutual fund investments much easier.


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