Mutual funds have become one of the most popular investment avenues in India. Due to the potential for good returns and the ease of investment, investors are increasingly turning to mutual funds. However, like any other investment, mutual funds also carry risks. Making uninformed decisions can lead to significant losses. Therefore, it is important for an 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, adequate emergency funds, etc. People start investing in random funds without knowing whether the fund is right for them. According to a SEBI report, 90% of investors in India withdraw their mutual fund investments within 3 years of making the investment. Investors are unable to stick to their investment plan because their portfolio does not match their needs. During times of market volatility, people tend to withdraw their investments. The solution to this is to have a comprehensive financial understanding. Knowing your assets, liabilities, short-term and long-term needs, retirement planning, etc. helps you choose the right funds.

Investing based on past performance

Investors often get bogged down in numerical data and base their decisions on it alone. A common mistake they make is choosing funds based solely on past performance. For example, if a fund has performed well in the past three years, it is assumed that it is a good choice for three years of investment. But the reality is that a fund’s past performance is not indicative of its future returns. Instead of focusing solely on past returns, it is crucial to evaluate the fund’s fundamental ratios. Assess the fund’s risk profile, its ability to mitigate losses during market downturns, consistency in performance, and the fund manager’s experience, 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 may find the same set of stocks across many funds. Over-diversification not only increases your investment costs but also makes it challenging to monitor too many schemes. Strive for a balanced portfolio. Instead of spreading your investments across too many funds, choose those that are efficient and align well with your financial goals.

Ignoring expense ratios: Opting for expensive oversight

Expense ratios reflect the percentage of a fund’s assets used for administrative and operational expenses. A high expense ratio can erode your investment returns. In mutual funds, each scheme category offers two options: Direct & Regular. Direct options generally have lower expense ratios as they avoid distribution costs. On the other hand, regular options tend to have higher expense ratios due to agent commissions. Compare expense ratios within similar fund categories carefully. Opt for the direct option to avoid distributor commissions. Index funds also offer lower fees compared to actively managed funds.

Making impulsive decisions

Markets are volatile. Some investors panic during a downturn and withdraw their investments, incurring losses. Mutual fund investments should be viewed with a long-term view. Choose funds that are fundamentally strong and stick to your investment strategy, and avoid making rash decisions based on short-term market fluctuations.

Ignoring tax implications

In India, mutual funds are subject to taxation. Ignoring this aspect can affect your net returns. Most of the time, investors do not understand that taxation is different for equity schemes, debt schemes, hybrid schemes, international schemes, etc. Mutual funds have short-term and long-term taxation. Be aware of the tax implications of your mutual funds. Always consult a financial advisor or tax expert before making any decisions to buy or sell.

Not considering SIPs

Many newbies to investing prefer to invest in lump sums. This can lead to higher risks. Systematic Investment Plans (SIPs) allow investors to invest a fixed amount regularly, regardless of market conditions. This not only averages out the purchase cost over time but also instills a discipline in investing.

Not renewing the portfolio over time

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

Falling into market hype

The media and market hype can often mislead investors, which can lead them to make hasty decisions. This often makes headlines when mutual fund schemes deliver 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 avoid financial advisors because they believe that mutual funds are simple. This leads to uninformed decisions. Especially if you are new to mutual funds, seek advice from financial experts. They can provide guidance tailored to your needs, risk tolerance, and financial goals.