Mutual Fund Investment: 5 common mistakes to avoid while investing in MFs

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The popularity of mutual funds is increasing in India day by day, but most people are still not aware of the dos and don’ts of the mutual fund investment. According to recent data, the mutual fund industry, in the last financial year on an average, has added about 9.74 lakh SIP (Systematic Investment Plan) accounts each month. Experts say people are now understanding the benefit of investing in mutual funds, and the opportunity to earn through the power of compounding over a period of time. However, with a lack of proper knowledge and guidance, investors are making mistakes while investing in the MFs. Continuing with such mistakes can make a mess of your investments.

Here are some common mistakes that one should avoid while investing in mutual funds:

  1. Opting for too many schemes in the name of diversifying — While investing in mutual funds, it is important to diversify your portfolio. However, adding too many schemes to one portfolio just increases the burden of tracking them. Ideally, you should invest only in a few schemes that offer exposure to the overall market. Try to build a portfolio of two or three well-managed schemes and then keep track of those investments.
  2. Timing the Market – Do not try to time the market, as even experts fail to do so. Many investors also sell their investments when the markets are high to maximize the returns, but only a few turn out to be lucky. The proper approach to investing in mutual funds is to do so at regular intervals, through SIP. This way your money grows over the tenure of the investment.
  3. Not doing Asset Allocation properly – Before starting to invest, understand the proportion in which you should invest in various assets, and what your asset allocation should be. To determine your asset allocations, sort your financial goals, your risk appetite and years left to achieve them. Also, you need to diversify your portfolio adequately while investing in various asset classes. This should include gold, fixed income, equity, and real estate among others. Avoid investing all your money in one place. If you have a large sum of money, putting it in one place is not a good idea. Experts say one should try taking a staggered approach and thereby avoid exposing themselves to timing risk.
  4. Ignoring Risk profile – Do not be driven by the fear of missing out. Most investors in a bull market ignore their risk profile and under peer pressure invest in risky avenues. Stick to your risk profile, especially if you are saving for a goal.
  5. Now reviewing your portfolio – Try reviewing your portfolio and track the performance of your investments at a regular interval. Experts suggest this should be done to avoid obstacles in one’s wealth creation, in the long run. Try to conduct a periodical review of all your MF schemes. This way you can know the funds underperforming in your portfolio and you can get rid of them.