10 Mistakes To Avoid While Investing In Mutual Funds
May 22, 2017

Author: PersonalFN Content & Research Team

At present, the market euphoria is so enthusiastically loud, investors are beginning to take equity investments seriously. Many are opting for a passive exposure to the markets and this has resulted in continuous inflows to mutual funds. As a result of the sustained rally in the Indian equity markets, many investors have started ignoring the fundamentals of mutual fund investing, and overzealous ones are inclined to make financial decisions that cost them dearly in the long run.

Listed below are the 10 most common mistakes investors could avoid while investing in mutual funds.

  1. Investing the investible surplus at one go (in lumpsum instead of SIPs):

    When markets are trending up, self-proclaimed market experts attempt to create a buzz around the prospects of Indian equity markets. Their commentary might appear so persuasive that you might be easily convinced that markets will not go down now. But, it’s a baseless assumption.

    The fact is, volatility is an indispensable part of equity oriented funds as an asset class. Therefore, if you invest a lump sum in mutual funds , you might expose yourself to a high-volatility risk. The best approach, to sail the tides of market volatility in your favour, is to opt for Systematic Investment Plans (SIPs) offered by mutual fund houses. With this simple technique, you give yourself a chance to accumulate more units when markets go down, and the Net Asset Value (NAV) of a mutual fund falls.
  2. Not selecting mutual fund schemes, recognising risk profile:

    Without a shadow of doubt, consistency in returns is an important parameter successful schemes are judged on. Although you asses the returns generated by a mutual fund scheme before investing in it, at times going overboard with the outperformance of the fund in the recent past, there is a tendency to overlook the “compromises” a mutual fund house might have made to deliver higher returns. Hence, always consider risk-adjusted returns.

    If the fund manager is taking the extraordinarily high risk to generate high returns, it might prove dangerous. For example, if a mutual fund scheme is overcommitted to some sectors and has taken concentrated bets only on few stocks, it might generate extraordinary returns until the underlying sectors and stocks are doing well. But when the tide turns, the same mutual fund scheme will start giving you sleepless nights.

    Similarly in the case of debt funds, if a mutual fund scheme invests in debt instruments of poor credit quality in search of better yields, it might benefit for a while. However, if the issuer of the debt instrument defaults the interest and principal payment, the fund might lose severely. In the past, Indian investors have learned this the hard way.

    Even the most seasoned investors make this mistake. So it is critical to assess the risk profile of a scheme before investing in it.
  3. Not aligning investing activity as per financial goals envisioned:

    Getting carried away by the success stories of others and investing in mutual funds without considering your financial goals, risk appetite, and most importantly, current financial situation, will prove to be a mistake in the future.

    For example, if you have a time horizon of say 2 years, and invest heavily in an equity oriented mutual fund, your investments will always look misaligned with your goals. Likewise, if you want to park some money for about a month, and invest in a long-term debt fund hoping to ride the opportunities in the bond market, you might lose money in a debt fund as well. So be careful about the fund selection.
  4. Choosing dividend option over growth while addressing long-term financial goals:

    If your goal is to grow capital in the long run, opting for the dividend option will end up eating away the accumulated profit at regular intervals. This will have a negative impact on your path to wealth creation as your profits won’t be reinvested.
  5. Timing the market, rather than “time in the market”:

    Chasing momentum is a detrimental habit for any investor. Here’s why...

    When chasing a stock that is rallying already, you tend to overlook their valuations and the other downsides associated with them. Equity assets can generate enormous returns in the long run, but their performance in the short term could be patchy. If you are investing in an equity oriented mutual fund, make sure you can hold your investments for at least 5 years
  1. Following the advice of family and friends to choose mutual funds (opting for Star-rated funds because they say):

    Trusting your relatives and friends is a great thing and may work wonders for your relationships, but unless they have expertise in personal financial matters, take their advice with a pinch of salt. Similarly, blindly investing based on the star ratings of mutual fund schemes can prove equally risky.

    What you need to check is the parameters the rating agency has considered for assigning the “star ratings”. Like naïve investors, if they too consider only returns of schemes, it’s better to seek professional counsel.
  2. Adding too many schemes in the portfolio:

    Diversification is the core principal for investing in mutual funds. But adding too many schemes to the portfolio, especially on the equity side, adds no value to your portfolio, increases the burden of tracking them, and may dwarf the potential of your portfolio to generate superior returns.

    Ideally, invest only in handful schemes that will offer exposure through the entire spectrum of the markets.
  3. Betting on sector funds:

    This is the riskiest choice you can make. When you are betting on a particular sector, there is always exposure to a risk of a sudden reversal. About 4-5 years ago, the Pharmaceutical funds were offering fabulous returns; however, burdened by a whole host of issues, they have fallen out of favour with large investors. As a result, individual investors who had invested in pharma funds are now sitting on glaring losses. So, invest in a diversified equity opportunities funds instead.
  4. Not focusing on asset allocation:

    Asset Allocation is simply the proportion in which you invest in various assets. The primary determinants of your asset allocations are your financial goals, years left before they fall due, and your risk appetite. If you don’t diversify adequately across asset classes viz. fixed income, equity, gold, and real estate among others, your hard-earned money is at risk.
  5. Not reviewing the portfolio:

    Ideally, monitor the performance of your investments on a regular basis. But, many of us fail to revisit the portfolio due to time constraints. This inaction can stall your wealth creation in the long run, being stuck with duds.

Avoiding these 10 mistakes will take you a step closer to becoming a successful investor. If you are looking out for mutual fund schemes that can create wealth over next 7-8 years without exposing your portfolio to elevated risk, then do consider subscribing to PersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025. In this report, PersonalFN will provide you with a readymade portfolio of its top recommended equity mutual funds schemes for 2025 that have the ability to generate lucrative returns in the long run. So, we highly recommend you to opt for The Strategic Funds Portfolio For 2025.

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