Mutual funds are ideal for investing money for retail investors in India. They help the retailers in meeting a variety of financial goals. However, there are certain things they have been doing wrong in mutual funds investing. Here is a list of certain common mistakes committed by the mutual fund investors.
- WAITING FOR THE MARKET TO CORRECT BEFORE INVESTING
Both greed & fear psychology is in action for investors who pause for the market to correct before investing their money. Though, waiting for the market to correct can theoretically work if you believe that the market itself is overvalued. But you should realize that it’s extremely difficult, if not practically impossible, to correctly call a market bottom. The investors should realize that the equity markets are unpredictable and mutual funds are long-term investments as per your goals, irrespective of market levels.
- INVESTING IN a LARGE NUMBER OF FUNDS TO DIVERSIFY RISKS
A mutual fund itself aims to diversify unsystematic risk, including stock-specific risk and sector-specific risk. It is not necessary that investing in a large number of mutual funds leads to more risk diversification. In order to diversify the risk of potential underperformance of a fund, you can split your investments in a few funds.
- PANICKING AND REDEEMING INVESTMENTS IN BEAR MARKET
You don’t need to be Warren Buffet to understand that you make money in equities by buying low and selling high. But most of the retail investors do exactly the opposite. They invest in funds whenever there is hype in the market and redeem in a bear market. However, it is natural for them to be stressed in bear markets when they see their portfolio diminishing in value every day. But they fail to realise that by redeeming the investment when the market has crashed, they do not gain anything. They should stay calm in the market corrections and also be disciplined regarding investment.
- MONITORING YOUR PORTFOLIO PERFORMANCE DAILY
The equity markets are undoubtedly volatile. On some days the market is up and down on the other. If you are monitoring your portfolio on a daily basis, you are just increasing your stress levels. As long as the equity investments are concerned, the investors must have a long investment horizon & review the performance of the funds in their portfolio relative to their respective benchmarks.
- NEVER MONITORING YOUR PORTFOLIO PERFORMANCE
Many of the investors do not take ample interest in their own investment. They invest taking the advice of their financial advisor and then do not care to see how their investment is doing. The financial advisors are often blamed for not actively or regularly reviewing the portfolio of their clients. If your financial advisor does not take care of your portfolio, then you should insist your advisor to schedule regular meetings with you to go over the portfolio.
- BOOKING PROFITS IN FUNDS WHICH GAVE GOOD RETURNS
This is amongst the worst mistakes that the investors make while investing their money in mutual funds. Here also, the greed & fear psychology is at play when the investors rush to book profits in funds that are doing well, in the fear that the value may go down in the future.
By booking profits in mutual funds that have performed well, the investors are giving up the future returns. The investors should recognise the funds in their portfolio that are not doing well. They should book losses in these funds and switch to funds that are performing well.
7. WITHDRAWING MUTUAL FUND INVESTMENTS BEFORE CONSIDERING OTHER OPTIONS IN EMERGENCIES
Sometimes certain situations arise when we are faced with a sudden large expense and we do not have sufficient balance in your savings bank to meet the expenditure. In such situations, the investors resort to redeeming their mutual fund units to meet such exigencies. But redemption of your mutual funds, especially equity funds, to meet unplanned expenses can have a very adverse impact on your long term financial goals.
As an ideal financial exercise, you should always set aside some emergency funds either in your savings bank account or in a liquid fund to meet any exigency. And in case your account balance is not adequate, you should have a striking order of which investments to redeem when you are faced with such situations.
8. IGNORING DEBT MUTUAL FUNDS
The debt mutual funds provide the investors with a great number of choices to invest across a large range of investment tenures & interest rate scenarios. It is true that the debt mutual funds are not entirely risk free and do not assure returns, but if you understand the risk return characteristics of debt funds and invest accordingly, then your return on investments can be substantially higher compared to assured return fixed income investments. Also they are more tax efficient than other fixed income investments.
9. IGNORING THE IMPACT OF TAXES
Unlike the bank fixed deposits, the equity funds don’t deduct tax (for resident investors) at the source. But that does release you from your obligation to disclose income from your investment in your income tax returns and pay the necessary taxes. In case you forget to disclose the income in your tax returns, be prepared for severe consequences.
10. INVESTING WITHOUT A FINANCIAL PLAN
A majority of people in India do not have a financial plan. Most of the times, they invest on an ad-hoc basis or on the advice of family members, relatives, friends or neighborhood agents. As a result, they end up having wrong priorities and are often not disciplined enough about investing. Financial planning is a crucial part in identifying and helps you meet your short term, medium term, and long-term financial goals.