5 mistakes you shouldn't commit during mutual fund investment

You might be hearing a lot about “invest in mutual funds” these days. There are huge sums of money being poured into mutual funds due to prospects of good return and comparatively high liquidity. Low volatility and conducive market environment have benefitted the investors greatly.

No one can predict the volatility of the market and what if the market condition in the near future, is not as good as it is today? Hence, investors need to introspect and put up a disciplined approach when investing in mutual funds. This will particularly hold true when the market condition is not too good. To sail smoothly through the markets, and to get guaranteed returns in the volatile market condition, here are 5 mistakes that you should avoid prior investing in mutual funds.

• Leaving commitments

Perhaps this is a rookie mistake that novice mutual fund investors are bound to commit. A lot of extrapolation is done while presenting returns over a short period to an investor. These numbers create the illusion that equity, as well as equity funds; can be invested over a short period.

This is not true and that a mutual fund investor should ensure that he invests over a period of 3 to 5 years and that he does not leave his commitments due to the interim losses that may occur in this mid-period. This will ensure that the investor does not get caught at the end of the market cycle.

• Believing that Mutual fund = Only equities

This perception s common both in individual, as well as retail investors and this myth, needs to be busted. Mutual funds are generally perceived as vehicles of investment for equity instruments, however, this is not true.

There are a large number of fixed income mutual funds and one should explore the market to find such instruments suitable for one’s current financial situation and need. Fixed income mutual funds are particularly useful when you do not want to expose yourself to risk, and volatility.

• Taking undue risks

There is only one effective way to ensure profits while investing in mutual funds and that is buying and holding. However, some investors do not fancy this strategy and opt for ideas that lure them into making undue money.

It almost becomes irresistible to invest in schemes that guarantee huge money while completely neglecting norms, security and guarantee. One should opt out of taking such undue risks and stick to the tried and tested formulae.

• Carrying huge diversification

Many investors prefer the diversification of their investments in mutual funds. However, what they fail to understand is that their investment already diversifies into various stocks, as well as sectors when they opt for diversified mutual funds. In addition, diversification makes it difficult to track and monitor. Hence, one should not opt for much diversification, unless and until he can manage them.

• Getting carried away by “talking points”

There is always some news, rumor, going on in the market. Many individuals even if they don’t know much, always have an opinion about everything. One should not let these things affect one’s investment plans and should only listen to authentic and trusted sources. Failing to do so may incur losses.

Bottom-line:-

Always do your homework. Match your investment with your investment horizon. There are a lot many factors that may influence your investment decisions, but it is up to you which factors to consider and which to let go. A careful analysis of the past trends, performances of mutual funds will help you to make more informed decisions.