Mutual funds are one of the finest ways to invest and grow your wealth. There are many mistakes made by investors while choosing a fund.
You can learn from this topic, the common mistakes most investors do while picking. If you are a beginner, learn this and always try to avoid these mistakes when you start investing.
If you are an experienced investor, please correct these mistakes and create a growing wealth without any panic and confusion. If you are not committing the following mistakes, it is well and good, please continue the same
Choosing Mutual Fund by Star Rating:
· The first mistake done by many investors is choosing a fund by star rating.
· In recent times, every new investor use online channels and applications like Zerodha, Groww, 5 paisa, Morning star, money control, etc.
· In these websites and applications, they use to rate the mutual funds on the performance over the last few years.
· Most often they use star rating. These ratings are not done by fact sheets and the shares involved.
· The mentality of investors to go for a 5-star rating. All 5 star rated funds don’t perform every year. There are only a few funds which are performing
Franklin Templeton debt funds were at 5 star rating till Jan 2020. When it faced an issue of delay in payment by Vodafone Idea, they did site pocketing of the segment and the fund NAV fall down by 5% in a single day.
The main reason for franklin debt funds to fall is it invested in many low CRISIL rated bonds. This may happen to you if you invest in a fund by looking at star rating rather than the bonds or stock they invest.
Investing in Regular Mutal funds:
· Investing in regular funds is another mistake most of the investors do. When I come across many people, who were blaming mutual funds ruin your money. I found that they have in a regular fund.
· Regular funds are invested through a channel broker. Since it is invested through brokers they charge extra in expenses ratio.
The expense ratio are the main factor to check while picking a mutual fund. Since expense ratio can be a factor to decide the performance of funds. Regular funds have more expense ratio than direct funds. So, please avoid regular funds. You don’t need a broker for investing in mutual funds.
· Many regular funds are in negative growth for many years.
· If you can’t manage your funds, please don’t come for investing in mutual funds. It is simple for choosing a fund. Check on the holdings and percentage of various stocks. Check the risk and reward of the fund by Morningstar.com
· These regular funds have expense ratios from 2-3%, which will definitely spoil the performance of your fund.
Investing by Reviewing Past Performance:
· Every fund will perform in a certain period under a fund manager and that too, when the sectoral stocks perform and your fund has most of the stocks.
· The next year the fund may perform or may not.
· While you see the past performance and invest in those funds, you will be investing in high NAV. When the fund feels a fall, your investments will be in negative.
· You will not be in a position to handle it and quit the fund by booking a loss. This will spoil your investment habit and make you in a situation not to invest further in mutual funds
· You have to understand in equity, there will be ups and downs and every time there will be an opportunity. This is what you should know in mind.
· This one secret will keep you a stayed investor and long term investor
Investing in equity should be a long term process to beat the market volatility. Your investments in equity mutual funds should be more than 10 years minimum.
Investing in Over Valued Market:
· This is one of the common mistakes by many investors, but many won’t accept this.
· The major investors who blindly invest through SIP (Systematic Investment plans) falls under this category
· Investors should have in mind, Index and market are the same. When Index is seen overvalued, Market has to correct itself or by the recession.
· When you invest by Lumpsum or SIP in a highly valued market. It is going to give you negative return as the market has to correct.
· Avoid equity market, when the NIFTY P/E is more than 22.
Shuffling Between Funds:
· There are many investors who always shuffle between many funds viewing at its performance.
· This one the biggest common mistake which investors do without knowledge.
· Before choosing a mutual fund, you can analyze or time your time to invest. But once you have invested, you have to keep on investing.
· If you don’t do so, your work on the particular fund is wrong. Redeem from a fund only if the performance is at worse.
· Shuffling between many funds will never yield you a better growth of wealth
· Also, many investors who invest in many funds of the same type. Example, investing in multiple index fund.
Conclusion:
· There are many mistakes that investors make while choosing and investing in mutual funds.
· The common mistakes are mentioned above. To have a healthy investment kindly avoid the mistakes.
· Choose wisely on mutual funds and have happy investing.