Investing in Mutual Funds? Here are 5 mistakes to avoid

Investors often have questions for the financial advisors on how to make their investments more effective. Here's a list of five mistakes that investors should avoid making.

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With the Mutual Funds market surging in the recent times, investors are increasingly taking interest in it. However, talks about a liquidity-driven rally and expensive valuations can make newcomers jittery.

With the underlying assets in a Mutual Fund being debt, equity, and cash in a predefined ratio, a fund manager is responsible for the fund allocation and performance. The performance of a fund depends on the investment philosophy, portfolio composition, the fund manager's efficiency and market fluctuations among other variables. However, investors often have questions for the financial advisors on how to make their investments more effective.

Here's a list of five mistakes that investors should avoid making:

Investing Without Planning

Mutual Funds offer a variety of choices for all kinds of investors, which means you have to know your goals and risk appetite to find a fund that is suitable for you. You must not blindly buy or sell a fund based on popularity or advice from friends without running your research and analysing your needs.

For example, a conservative investor, who wants to protect his or her capital more than anything, must go for a debt fund or a balanced fund. Investors who have a high-risk appetite and are willing to take risks to get good returns can go for equity Mutual Funds.

Getting Greedy

Sometimes, when the market is moving upward, investors get tempted and put all their money into the fund that is performing well. This could lead to a skewed portfolio with too much invested in similar funds. Any miscalculation could lead to a huge loss. It's always recommended to have a balanced portfolio.

For example, an investor might have achieved 60% return in a year from a banking sector fund. If he decides to go for more banking sector funds from different asset management companies (AMCs) in the successive years, he could gain from it if the banking sector does well or face losses in case there is banking crisis amid inflation or rising NPAs. So, altering other investment plans to buy a certain kind of funds could backfire anytime.

Churning Portfolio Like Stocks

Do not churn your Mutual Funds portfolio like stocks. Mutual Funds contain a set of underlying stocks and bonds. Selling a fund and buying a similar fund from another AMC would only make it unproductive. It is equivalent to selling and buying the same stock. Moreover, it would involve an additional cost in the form of exit load. Over the long term, these costs add up and might have a detrimental impact on the returns.

Looking At Recent Performance To Evaluate Mutual Funds

Most rating companies assess Mutual Funds based on their performance in the recent past. So, the ratings change as and when there are fluctuations in performance. Investors should be careful when it comes to assessing a Mutual Fund's performance. The best metric to evaluate a scheme is its long-term performance. Evaluate the long-term (five years and above) Compounded Annual Growth Rate (CAGR) of the fund. The longer you go back in time, the better you can assess the estimated returns from a fund.

Going After New Fund Offers (NFOs) Without Research

Some investors are very keen on investing in New Fund Offers, assuming them to be having similar potential as that of IPOs. NFOs are certainly new funds but the underlying assets are not always new, unlike that of IPOs.

There is no difference between investing in an old equity fund that puts money in blue chip companies and a new fund that invests in the same set of companies. The return depends on how the underlying companies perform. If they perform well, the net asset value of both funds would go up. However, there are a few NFOs that are based on new sectors, themes, or a new set of companies. Such NFOs have the potential to scale up returns.

A careful and disciplined investment can go a long way. If you don't want to take the risk, you can always rely on the fund managers who take the complete responsibility of studying, selecting, and monitoring investments at a nominal fee of 1% to 2% (known as expense ratio).