A mutual fund is a professionally-managed financial instrument, usually run by an asset management company. The fund is made up of money collected in from several investors who share a common (‘mutual’)investment objective.
The mutual funds are managed by fund managers who are professionally qualified and well experienced. The collected money is then invested in various other financial instruments such as bonds, equities, and/or other securities.
Discussions about mutual funds are common nowadays because of the advertisements and youtube videos. So recently, many people who earlier used to invest in the traditional saving schemes (FD, Savings accounts, PPF, etc)are showing more interest in investing in mutual funds.
Is it Safe to Invest in Mutual Funds?
We know that in fixed deposit and saving accounts, we will get a fixed rate of interest. So we don’t need to worry about the performance of the asset and also it’s secure up to a certain limit. But in the case of mutual funds, there are a lot of risk factors involved. If you don’t know much about the stock market and bonds there is a high chance of making mistakes. So you have to be more careful before investing in mutual funds.
Here we are going to discuss about 7 Common mistakes made by novice investors while investing in mutual funds.
1.Not Defining any Goals Before Investing
You should clearly define your financial goals before starting investing in mutual funds. Before stepping into a particular the mutual fund scheme make sure your financial goals are set either short term or in for the long term. If you want to park your funds for a very short period then you can consider debt funds (liquid funds). But if you can invest for a long period ( more than 10 years) then it’s better to go with equity funds.
2.Investing Without Proper Research and Analysis
Before investing in a mutual fund it is necessary to do proper research about a particular mutual fund scheme. Before selecting funds define your risk profile(high, moderate, or low risk) then select funds accordingly.
Then analyse that fund by considering factors like asset size, historical returns, fund types, expense ratio, exit load, etc.
3.Reacting to short term market fluctuations
The fundamental of investing in the mutual fund is to generate a sizeable amount of capital in long term. But generally, if some bad news comes to the market then the market will start to fall. At that time most people will withdraw their money or stop investing due to fear.
In short term, there will be a lot of fluctuations in the market. If your risk is defined and if you are ready to invest for the long term, then follow your investment strategy. Otherwise, someday you will regret about your decision.
4.Waiting for the perfect time to start investing
There is no perfect time for investing in a mutual fund. In the short term, the market may be volatile means that there are ups and downs. But if you are planning to invest long-term for wealth creation then you do not need to worry about short-term fluctuations. If you have enough funds for investing and reserved enough for the emergency fund then you can start investing now.
5.Investing Without Having An Emergency Fund
Some brokers and agents will mislead you about making money through mutual fund investments in the long term. You can indeed make a good return if you invest in the right funds. But before investing your entire bank balance in mutual funds, you should need to have some money kept aside as an emergency fund.
If you are investing without keeping a minimum emergency fund to face situations like a medical emergency, then it will force you to redeem your mutual fund investments, this will result in paying an extra exit load to the agencies and also chance for booking loss is higher. Exit load is one type of charge which is levied by a Mutual Fund company if you redeem any units within a specific period from the date of investment.
6.Inadequate investment amount
In the case of mutual funds, increasing your SIP amount in accordance with the growth in your income is a necessity. In long run, if the SIP amount remains the same and it will eventually result in the failure of making the desired amount of money. Maintaining the SIP in time to time is requisite.
7.Not monitoring fund’s performances periodically
We know that there are lot of people investing in mutual funds, but in that only a few of them track their funds performance periodically. Most of the investors think that mutual funds are risk free but its not like that. Lack of periodic evaluation of funds results in keeping your portfolio filled with junk investments which keep pulling your mean portfolio returns down.
