Mutual funds have become one of the most popular investment avenues in India. With the possibility of good returns and the convenience of investing, investors are increasingly turning to mutual funds. However, just like any other investment, there are risks involved. A wrong decision can lead to huge losses. Therefore, it is important for the investor to be aware of common mutual fund mistakes. Let's take a look at some of the mutual fund mistakes that you should avoid.

Lack of financial planning

Many investors enter the world of mutual funds without determining their risk appetite, overall financial situation, and need for emergency funds. People start investing in random funds without knowing whether that fund is suitable for them. According to SEBI's report, 90% of investors in India withdraw mutual fund investments within 3 years of investing. Investors are unable to stick to their investment plan as their portfolio does not match their needs. During market volatility, people tend to withdraw their investments. The solution is to have a comprehensive financial understanding. Knowing about your assets, liabilities, short-term and long-term needs, retirement planning, etc., helps you choose the right funds.

Investment based on past performance.

Investors are often obsessed with numerical data and base their decisions solely on it. A common mistake they make is to select funds based only on past performance. e.g. If a fund has performed well in the last three years, it is assumed that it is a good choice for a three-year investment. However, the fund's past performance does not reflect its future earnings. Instead of focussing only on past returns, it is crucial to evaluate the fund's underlying ratios. Evaluate the risk profile of the fund, its ability to mitigate losses during market downturns, stability in performance, experience of the fund manager, etc.

Over-diversification

While diversification is essential to reduce risk, over-diversification can lead to unnecessary portfolios with similar holdings across different schemes. In India, within equity mutual funds, 60% of the industry's assets under management (AUM) are invested in Nifty 50 stocks, so you'll find the same set of stocks in many funds. Over-diversification not only increases your investment cost but also makes it challenging to monitor excessive schemes. Try to have a balanced portfolio. Instead of spreading your investments across too many funds, choose ones that are efficient and align well with your financial goals.

Ignoring cost ratios: choosing expensive supervision

The expense ratio reflects the percentage of the fund's assets used for administrative and operating expenses. A high expense ratio will erode your investment income. In mutual funds, each scheme category offers two options: Direct & Regular. Direct options generally have a lower cost ratio because they avoid the cost of supply. On the contrary, regular options will have a higher expense ratio due to agent commissions. Compare the expense ratios within the same fund categories. Choose the direct option to avoid the commissions of the suppliers. Index funds also offer lower fees compared to actively managed funds.

Making the decision to sell

The markets are unstable. Some investors panic during the downturn, withdraw their investments and suffer losses. How not to look at mutual fund investments for a long time. Choose funds that are fundamentally strong and stick to your investment strategy, and avoid making hasty decisions based on short-term market fluctuations.

Ignoring tax implications

In India, mutual funds are subject to taxation. Ignoring this aspect will affect your net returns. Most of the time, investors do not realise that the tax is different for equity schemes, debt schemes, hybrid schemes, international schemes, etc. There is a short-term long-term tax on mutual funds. Be aware of the tax implications of your mutual funds. Always consult with your financial advisor or tax professional before making any purchase or selling decisions.

SIPs are not considered.

Many people who are new to investing prefer one-time investments. This leads to more risks. Systematic Investment Plans (SIPs) allow investors to invest a fixed amount on a regular basis irrespective of market conditions. This not only averages the purchase cost over time but also instills a discipline in investing.

Portfolio does not renew on time

Not re-reviewing your mutual fund portfolio and renewing it over time can lead to holding of bad funds. Review your portfolio at least once a year. This will help you assess the performance of your funds and make the necessary adjustments.

Market plunges

Media and market hype can often mislead investors, causing them to make hasty decisions. It is often in the news when mutual fund schemes give exceptional returns. But there is no guarantee that the fund will be able to maintain its high returns in the future. So instead of following the market hype, focus on research and reliable financial advice.

Not seeking expert advice

Some investors, who believe that mutual funds are simple, avoid financial advisors. This leads to uninformed decisions. Especially if you're new to mutual funds, seek advice from financial experts. They can provide guidance tailored to your needs, risks, and financial goals.