With the rise of popularity of Mutual Funds for last 2 years and Commercial Ads such as “Mutual Fund Sahi Hai”.A Lot of New Investors have started to invest in mutual funds aggressively. But these new investors also make mistakes which tamper their portfolio returns. Let us see what are the 10 Mutual Fund mistakes investors make and how we should avoid them.
1) Always Invest in Direct Mutual Funds
Mutual Fund Investors should always invest in direct plans and not regular plans, regular plans eat investors returns by paying commissions to distributors. But the real problem is investors don’t know the difference between direct and regular plans and how to switch from regular to direct plans.
Investors should use Apps like Groww and Kuvera to invest in direct plans of mutual funds and earn commission-free returns. So Always invest in Direct Plans for better returns.
2) Investing in Dividend Reinvestment Plans.
One of the common mistake new investors make is to invest in a Dividend Investment Plan to Create a Corpus. Always make a note and invest in dividend plans for passive income & to create a corpus invest in growth plans avoid dividend reinvestment plans.
Reinvested Dividends are subject to DDT (Dividend Distribution Tax) before they are reinvested, these taxes hurt your returns. There is no such DDT in Growth Plans as they do not declare dividends.
You make money in the Dividend Reinvestment Plan by reinvesting your dividends and acquiring more units while in Growth Plans you make money by an increase in NAV of the Mutual Fund.
3) Investing in Sector Funds
Another mistake which new investors make is to invest in highly risky Sector Funds. Sector Funds are Mutual funds which invest in a particular sector such as Pharma Funds invest in Pharma Stocks, Banking Funds invest in Banking Stocks and Infrastructure Funds invest in Infra Stocks.
Sector Funds less diversification makes them really risky and sector funds always move in phase with the Sector which means if the Sector does well, the fund does well and vice versa. For Ex. In 2015 Pharma Stocks were doing really well but after 2015 all Pharma Stocks are down and have given muted returns, the Same is reflected in Pharma Funds which have done well in 2015 but after 2015 they are struggling to generate returns for its investors.
4) Investing Lumpsum When Markets are at Record Highs
The Greed in many investors makes them invest huge lumpsum amounts into mutual funds when the markets are at a record high.
They think making a lumpsum investment can make them huge profits but actually happens only opposite markets correct from record highs and they start running into huge losses. Again out of fear they sell their complete investment and book losses.
To avoid these market sentiments it recommendable to avoid lumpsum investment into mutual funds when markets are at record highs. Invest regularly through SIP’s at all market levels to get cost averaging benefits as well.
5) Not Opting for Incremental SIP
Investing in SIP’s comes with two options such as Normal SIP and Incremental SIP. In Normal SIP the same amount is invested throughout the life of the SIP but incase of Incremental SIP the Amount of SIP is Increased every year at a predetermined rate as given by the Investor.
Ex. If you Start a Normal SIP with Rs.5000 pm. for 10 Years, each month the same amount will be deducted from the Bank Account and invested into mutual funds. But in case of an incremental SIP of 10% p.a. Started with Rs.5000 for 10 Years, In the First Year, Rs.5000 will be deducted per month, from the second year Rs.5500 (5000+10%) the 3rd Year Rs.6050 (5500+10%) so on forth till the 10th Year.
So Always invest with Incremental SIP instead of normal sip for better corpus at the end of the life of the SIP.
6) Selling Mutual Funds due to Market Volatility / News
Investors are often too much sensitive to market news, they react too fast without actually understanding the real fact of the issue.
This news can cause investors to sell their funds in panic and cause the market to fall further without understanding the real cause of concern.
So never sell your mutual funds reacting to market news or market noises always sell your mutual funds after your goals are achieved.
Also Read – When to Sell Mutual Fund?
7) Not Investing Patiently
One of the important qualities Stock Market / Mutual Fund investors need to have is to have patience. Patience is required for creating wealth in the long term.
Markets may go up or down but you need to patiently be invested, If your fund has underperformed for 1-2 Quarters you should look for reasons of underperformance if reasons are acceptable you should be patiently invested in Mutual Funds.
Investors who had started to invest in 2014 did not see any returns for the next 2 years, 2015 & 2016 were years of flat returns, people who were impatient sold their units and invested somewhere else but people who were patient and were invested saw multifold returns in 2017 Bull run. So Always be patient with your investments they will get good returns for you.
8) Not Doing Your Own Research
Many first time investors in mutual funds do not do their own research and invest in the recommendations of their funds or neighbours.
You can do your own research by visiting sites such as Moneycontrol or Value Research. These are very good sites where you can get all the data to research on mutual funds. Doing your own research is really important to the success of mutual fund investing.
You can also visit our “Mutual Fund Review” Section where we publish Mutual Funds review and help you to make a better investment decision.
9) Not having an emergency fund of at least 6 Months of Expenses
It is a mandatory requirement for everyone to have an emergency fund of at least 6 months of expenses saved in a liquid asset class.
An emergency fund is more important to mutual fund investors because of when they are in need of funds they are not required to sell your mutual funds. An emergency fund helps in protecting your mutual funds’ investment in case of an emergency.
So Please save up at least 6 months of expenses in a liquid fund such as FD, Liquid Fund, Short Term Debt etc.
10) Not Investing for Long Term
The biggest mistake investors make is to not invest for the long term and to sell their mutual fund holdings for short term gain or reacting to market news.
Always invest in the equity asset class for long term (At least 7 Years) in the short term markets can be really volatile and you can incur a loss but in the long term markets and mutual funds perform really well and outperform each and every asset class.
Investing for the long term requires qualities such as patience, not reacting to sudden market news, Ignoring market volatility, Ignoring market ups and downs. If you can invest for the long term then only you can make money in mutual funds otherwise each time you invest for the short term you will end up in losses.
Hope you are able to understand Mistakes Mutual Fund investors make and how to avoid them. If you have any questions do let us know in the Comments Section Below & Thank You very much for reading.