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 many investors make is choosing a fund by star rating.
- Every new investor has recently used online channels and applications like Zerodha, Groww, 5 paise, Morning Star, money control, etc.
- These websites and applications rate mutual funds based on their performance over the last few years.
- Often, star ratings are not based on 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. Only a few funds are performing well.
Franklin Templeton debt funds had a 5-star rating until January 2020. When Vodafone Idea delayed payment, they site-pocketed the segment, and the fund’s NAV fell by 5% in a single day.
Franklin’s debt funds fell mainly because they invested in many low CRISIL-rated bonds. This may happen to you if you invest in a fund by looking at its star rating rather than the bonds or stocks it invests in.
Investing in Regular Mutal funds:
· Investing in regular funds is another mistake most investors make. I came across many people who blame mutual funds for ruining your money. I found that they have 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 have been 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 to choose 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 2-3% expense ratios, which will spoil your fund’s performance.
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 invest in a high NAV. When the fund feels a fall, your investments will be negative.
· You cannot handle it and quit the fund by booking a loss. This will spoil your investment habit and put you in a situation not to invest further in mutual funds
· You have to understand that in equity, there will be ups and downs, and there will be an opportunity every time. This is what you should keep 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) fall under this category
· Investors should have in mind, Index and market are the same. When the Index is seen as overvalued, the Market has to correct itself or a recession.
· When you invest by lump sum or SIP in a highly valued market. It will give you a negative return, which the market must correct.
· Avoid the equity market when the NIFTY P/E is more than 22.
Shuffling Between Funds:
· Many investors always shuffle between many funds, viewing their performance.
· This is one of the biggest common mistakes investors make 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 worse.
· Shuffling between many funds will never yield you a better growth of wealth
· Also, many investors invest in many funds of the same type. For example, investing in multiple index funds.
Conclusion:
· Investors make many mistakes while choosing and investing in mutual funds.
· The common mistakes are mentioned above. To make a healthy investment, kindly avoid mistakes.
·Choose wisely on mutual funds and have happy investing.