COMMON MISTAKES INVESTORS OFTEN DO WHILE CHOOSING A MUTUAL FUND

Mutual funds have recently seen much more acceptance from general investors as compared to earlier times when it was deemed too much risky. That does not signify that the crowd of people turning blind eye to mutual fund has decreased; it is still quite a huge amount of people who are still afraid or unaware of how to invest in mutual funds correctly, but with the recent surge in advertisements for Mutual fund along with campaigns from popular cricket stars, has definitely helped loosen the nerve of a lot of people who used to wary of investing in Mutual Fund.

The biggest problem, however, is how do you determine which mutual fund would actually be good for you. While everyone with even a minute sense of investment does not hesitate from giving free advice about certain funds, there are actually a lot of wrong judgments that people do when dealing in Mutual Funds. Below are few pointers that we felt the need to highlight:

1. One Particular Success Mantra:

Generally, we have seen coming across investors who chose a particular fund from a particular fund house which coincidentally did well as well. And that is where the mistake starts occurring. The investor more often than not, sticks with the particular fund regardless of the market conditions, tops up more amounts in the same fund or even recommends the same to others without realizing their risk profile. Some even go to the extent that they decide not to even look outside that particular fund house! This eventually ends up costing them a lot, as if the funds go for a toss, the overall value of the investor takes a jolt as well. Remember, diversification is the key and that there can never be a specific Mantra that works in all situations.

2. Year Wise historical performance:

Majority of the investors get stuck up in this parameter. This one actually ends up being a huge mistake for the investor. Every fund listing shows performance of certain intervals but while it is important to consider those returns, it should not be the be all and end all for choosing a mutual fund. The pictorial says that if an X amount was invested on a Y date 5 years ago, this the percentage of return that it gave. This figure can very well be affected due to the recent performance of the fund as well. Thus, while historical returns should be looked at, ultimately how they are expected to roll returns along with other studies is where lies the key.

3. Last Year Performance:

Borrowing from the second point, a lot of people end up looking at the very recent returns to gamble with their funds. This may or may not work for the investor, but regardless of that, it is not at all a statistic where a selection of a fund should be based on, since it is impossible to judge solely basis this statistic that fund is good for the investor or not.

4. Void Comparisons:

Just like you cannot compare a Nokia 1100 to an iPhone, A budget friendly hotel to a 5-star hotel, similarly you should never compare funds of different categories or benchmarks together. In both the examples of the cases mentioned above, both the items in each category have their own purpose and cater to their segment of audience as per their need. Same applies to a mutual fund. A lot of times the investor compares fund performance of a balanced fund to a large cap fund or a thematic fund to a cyclical fund, which will never give you a clear picture. All that websites do is put the returns of these funds juxtaposed to each other, but it is never a valid comparison simply because they comprise different needs of the hour, characteristics and ability to perform in the prevailing market scenario.

5. Invest and Forget:

This is an area of mistake a lot of investors including their concerned advisors do. An investor’s mindset is made accustomed to the fact that whatever he invests in, should not be looked upon citing “long term growth” etc. While, we do not say that investors should be checking in on their investments by the hour, it also does not mean that investors should never review their portfolio or barely check it. Imagine this! An employed bachelor staying all on his own, might not be having the time to clean his house every day, but eventually in free time on a particular day, he would check on it and clean it or get it cleaned. Mutual fund investments work in the same way, it is always important to keep reviewing your portfolio, or in our case we keep doing it for you. Turning a blind eye to your baby i.e., your investment is never ever ideal.

While investing on the surface seems easy, as more often than not, people choose funds based on the above points or simply follow a herd mentality, it is not so. Each one has different requirements with different risk appetite and a different profile for the same. Thus, it is important to build your portfolio with the help of proper guidance and advice rather than to aim in the dark and hoping to hit the bull’s eye.

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COMMON MISTAKES INVESTORS OFTEN DO WHILE CHOOSING A MUTUAL FUND

1. One Particular Success Mantra:

2. Year Wise historical performance:

3. Last Year Performance:

4. Void Comparisons:

5. Invest and Forget:

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