If You Are investing In Mutual Funds, Here’s What You Should Avoid

Divya Nair

03 Nov 2016

While every mutual fund investor is advised what he/she needs to know while investing, it is equally important to know what they must NOT do when investing in mutual funds. By and large, appropriate asset allocation and fund selection, effective diversification etc. are some of the fundamental goals that every investor look for in a portfolio. To attain these goals, investors are prone to making several mistakes. This article discusses the most common yet repeated mistakes committed by investors.

Take A Note Of The Following Mistakes while Investing In Mutual Funds

1. Investing For Short-Term:

Investing for long-term averages any possible short-term losses. Long-term investments are the best to follow as it usually give better results. One should however keep reviewing ones investments. Investors should define long-term financial goals and attach each goal to one mutual fund and keep on investing till they reach that goal.

2. Chasing Past Performance:

A funds performance in the past does not guarantee its future performance. While past performance can help narrow chances of selecting non-performing funds, it should not be the only reason to choose a particular mutual fund.

3. Getting Tempted By Higher Returns:

Usually, companies which have good credit ratings offer lower interest rates. On the other hand, companies which have low credit ratings usually offer higher interest rates. A lot of investors pick low-rated debt securities to receive higher interest rates. But the fact is the main objective of debt instruments is to get regular income with safety of investments.

4. Not Going For Open-Ended Mutual Funds

New investors can join open-ended schemes by applying directly to the mutual fund at applicable net asset value (NAV) related prices. Open-ended schemes can issue and return units any time during the life of the scheme. Close-ended funds do not have these features.

5. Not Looking At Risks Associated:

While selecting mutual funds for investments, most of the investors focus on only returns and overlook the risks associated with the selection. Since no investment is devoid of market risk, it is important to identify the risks related to one’s selection. Realizing the importance of getting investors’ risk profiling done, 5paisa.com has launched “Auto Investor”. It is an intelligent advisor that understands customer behavior, their risk profile, individual preference, investment period and many other factors.

7. Investing In Many Mutual Funds:

Some people invest in 10-15 mutual funds and later fail to manage their portfolio accurately. The selection of mutual funds depends on your risk appetite and the time horizon you are going to invest. It is a safer approach to diversify investments into not more than 5 mutual funds. That apart, the number of mutual funds should be manageable and investors must review them once in 6 months at least.

Conclusion - Committing mistakes while investing is very much a part of learning process. Even the smartest investors are prone to make mistakes and often chew bitter pills later in their investment journey. However, knowledge of the above explained common mutual fund investing errors can help you minimize your losses and help you choose the best funds.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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If You Are investing In Mutual Funds, Here’s What You Should Avoid

Divya Nair

03 Nov 2016

While every mutual fund investor is advised what he/she needs to know while investing, it is equally important to know what they must NOT do when investing in mutual funds. By and large, appropriate asset allocation and fund selection, effective diversification etc. are some of the fundamental goals that every investor look for in a portfolio. To attain these goals, investors are prone to making several mistakes. This article discusses the most common yet repeated mistakes committed by investors.

Take A Note Of The Following Mistakes while Investing In Mutual Funds

1. Investing For Short-Term:

Investing for long-term averages any possible short-term losses. Long-term investments are the best to follow as it usually give better results. One should however keep reviewing ones investments. Investors should define long-term financial goals and attach each goal to one mutual fund and keep on investing till they reach that goal.

2. Chasing Past Performance:

A funds performance in the past does not guarantee its future performance. While past performance can help narrow chances of selecting non-performing funds, it should not be the only reason to choose a particular mutual fund.

3. Getting Tempted By Higher Returns:

Usually, companies which have good credit ratings offer lower interest rates. On the other hand, companies which have low credit ratings usually offer higher interest rates. A lot of investors pick low-rated debt securities to receive higher interest rates. But the fact is the main objective of debt instruments is to get regular income with safety of investments.

4. Not Going For Open-Ended Mutual Funds

New investors can join open-ended schemes by applying directly to the mutual fund at applicable net asset value (NAV) related prices. Open-ended schemes can issue and return units any time during the life of the scheme. Close-ended funds do not have these features.

5. Not Looking At Risks Associated:

While selecting mutual funds for investments, most of the investors focus on only returns and overlook the risks associated with the selection. Since no investment is devoid of market risk, it is important to identify the risks related to one’s selection. Realizing the importance of getting investors’ risk profiling done, 5paisa.com has launched “Auto Investor”. It is an intelligent advisor that understands customer behavior, their risk profile, individual preference, investment period and many other factors.

7. Investing In Many Mutual Funds:

Some people invest in 10-15 mutual funds and later fail to manage their portfolio accurately. The selection of mutual funds depends on your risk appetite and the time horizon you are going to invest. It is a safer approach to diversify investments into not more than 5 mutual funds. That apart, the number of mutual funds should be manageable and investors must review them once in 6 months at least.

Conclusion - Committing mistakes while investing is very much a part of learning process. Even the smartest investors are prone to make mistakes and often chew bitter pills later in their investment journey. However, knowledge of the above explained common mutual fund investing errors can help you minimize your losses and help you choose the best funds.

Have Referral Code?