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7 Mutual Fund Mistakes to Avoid - Don't Fall Into These Traps
Investing is one of the most crucial things one can do to help them secure their financial future and achieve long-term wealth goals. While there are many investment options available, a go-to option for many investors is Mutual Funds.
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Mutual funds are investment vehicles that pool money from multiple investors to create a diversified portfolio of assets, including stocks, bonds, and other securities. With a wide range of mutual funds available to investors, catering to their different investment preferences and risk tolerance levels, investing in mutual funds is an attractive investment option for many.
However, like any other investment, mutual funds are subjected to risks. Many investors unknowingly fall prey to common mistakes they wish they had known about before. So, if you are a novice investor, looking to invest in mutual funds, here are seven mutual fund mistakes to avoid:
Seven Common Mutual Fund Mistakes to Avoid as a Beginner Investor
Solely Focusing on Historical Performance
If you are solely focusing on historical performance while choosing funds, you will be sorely disappointed. While past performances can provide you with some insights, they do not guarantee future results. That’s because the top performers change every year.
To make smart mutual fund investment plans, you need to consider the fund manager's strategy, risk management practices, and overall market conditions. You, as an investor, need to scrutinise every aspect of the fund rather than just focusing on past performance.
Imitating Other Investor's Strategies
Oftentimes, we read a book from an investor or talk to a friend who has gotten good returns and feel the need to copy their approach. While there is nothing wrong with following someone’s path, copying the investment strategies of others without considering your own risk tolerance and financial objectives can be risky. What works for one investor may not necessarily work for another.
Starting Without a Financial Plan
Do you go on a vacation without deciding the destination? No right! So, why invest in mutual funds without having a financial plan? Without a financial plan, investing is like shooting arrows in the dark. A mutual funds investment plan helps you:
- Determine your investment objective
- Keeps you on track
- Provides measurable steps
- Stay motivated and focused
So, don’t make this mistake and create a financial plan for yourself before investing.
Investing Heavily in Small and Mid Caps
In the short term, small and mid-cap funds tend to give amazing returns, which naturally make many investors invest in them. However, these funds are not meant for everyone. Only if you have a high appetite for risk should you invest in these funds. If you are someone who doesn’t like ups and downs in their portfolio, you need to use small and mid-cap funds as a tool for diversification.
Expecting Guaranteed Return
Yet another mutual fund mistake that many investors make is expecting guaranteed returns. Unlike fixed deposits, mutual funds are subject to market fluctuations and do not offer guaranteed returns. Their performance is influenced by various factors, including economic conditions, interest rates, and market trends. That’s why you need to have realistic expectations and understand that while mutual funds can offer higher returns than traditional investments, they always come with risks.
If you are looking for a way to know the expected returns for mutual fund investments, consider performing mutual fund calculations using a calculator.
Comparing Funds
Some investors compare the performance of funds like comparing apples with mangoes. They forget that funds are categorized by structure, risk, investment horizon, investment objectives and others. For instance, if you want to invest in large-cap funds, you cannot compare it with small-cap funds. The comparison between the funds should be made on the basis of the right benchmarks and within the same category.
Failing to Review the Portfolio Regularly
Not reviewing your portfolio periodically is yet another mistake that many investors make. By reviewing your portfolio regularly, you can cut risks and problems, leading to boosted returns. For instance, some funds may perform exceptionally well for a few years, prompting you to hold onto those investments based solely on their initial success. However, over time, these investments can experience a decline in performance. To optimize your investment strategy, it is crucial to periodically assess your portfolio, eliminate underperforming assets, and seek out new investment opportunities.
By avoiding these common mistakes and adopting a disciplined, long-term approach, you can maximize your chances of achieving your financial goals through mutual fund investments. Remember to always do as much research as you can on the fund you are investing in to make the most informed decision.
Conclusion
Muthoot Finance offers a diverse range of well-managed mutual funds, including some of the best SIP plans for long-term investment, designed to align with your financial goals and risk tolerance. With a reputation for expertise and reliability, we can provide you with the guidance and support needed to navigate your investment journey without any hassle.
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