According to industry reports, the mutual fund industry is growing very fast and lakhs of new Systematic Investment Plan (SIP) accounts are being opened by investors each month. One of the reasons for investing in mutual funds is the opportunity of earning through the power of compounding. However, experts say, even though mutual fund investments are on the rise, most people are not aware of the mistakes they usually make while investing in mutual funds.
Here are some common mistakes that mutual fund investors should be aware of:
* Over diversifying – Opting for many schemes is one of the most common mistakes investors make, in the name of diversifying. It is important to diversify a portfolio while investing in mutual funds. However, adding too many schemes is not the right way to go about it. Experts say having too many schemes in a portfolio just increases the burden of tracking them.
One should ideally invest only in a few schemes that offer exposure to the overall market. One could build a portfolio of 2-3 well-managed schemes, which will also be easier to track.
* Speculating and timing the market – To maximize the returns some investors sell their investments when the markets are high but that’s not always the case – only a few turn out to be lucky. There is a high chance that it might not work for you.
Experts say one of the biggest mistakes investors, especially new investors, make is trying to time the market. The proper approach to investing in mutual funds is investing in them at regular intervals, through systematic investment plans (SIP). With SIP the investment also gets the chance to grow over the tenure in a disciplined manner.
* Focus on asset allocation – Asset allocation is necessary while investing, wherein investors have to determine the proportion in which they should invest in various asset classes. However, asset allocation depends on certain determinants such as one’s financial goals, years left before they fall due, risk appetite, etc. Experts say while investing an investor needs to diversify his/her portfolio adequately across asset classes such as fixed income, equity, gold, and real estate, among others.
* Putting all money in one place – Investing in mutual funds becomes tricky if one invests all their money in one place. Hence, investing a large sum of money in one place is not a good idea. Taking a staggered approach to invest in the right way to go, along with avoiding exposing oneself to timing risks.
* Ignoring risk profile – We all are driven by the fear of missing out. Similarly, in a bull market, investors ignore their risk profile and under peer pressure invest in risky avenues. However, that is one of the biggest mistakes. Industry experts say while one is saving for a goal, he/she should stick to it.
* Not reviewing the portfolio – Usually it is suggested that an investor should track the performance of his/her investments at a regular interval, i.e. at least once or twice a year, but most of us fail to do so.
To avoid obstacles in their wealth creation, in the long run, an investor should conduct a periodical review of all his/her mutual fund schemes. This will help them know about any underperforming funds in their portfolio, so they could get rid of them on time.