There’s a common misconception about investing in mutual funds means that you can invest in funds and buy whatever number of funds but everything will be safe because mutual funds are managed by the experts. That’s not true. You can still make mistakes and that will hurt only you and your hard earned money.
See, there a way of creating a mutual fund portfolio but for someone who is completely inexperienced might end up making a weird portfolio.
See, we don’t advise to buy funds or stocks but, in this article I have mentioned 8 mistakes that are commonly made. I have heard many people calling to experts on TV and telling them about their silly mistakes.
1. Don’t Just Buy Everything You See On The Name Of Diversification
See, diversification has it’s benefits but the strategy doesn’t benifits when you overuse it. When you start buying every investment instrument you see on the name of diversification, you basically park your money into too many assets which will give a limited returns and you might end up loosing the ‘potential returns’ by not investing enough in high return instruments.
See, diversification strategy is used to protect you portfolio from high volatility of the equity markets. But the strategy doesn’t gurentee that it will protect your portfolio from being nagitive. You simply can eliminate the risk factor if you’re investing in equity. No matter how many strategies you use, still no gurentees.
Coming to the point, I want to say that if you want to diversify your portfolio than you must understand that there’s a limit and after you cross the limit and over diversify your portfolio, it will stop benifiting as you wanted.
One more point I would like to add. See, there’s a reason why people come to equity markets, people want more returns than others fix returns investment instruments. When these people come and park their hard earned money into equity markets, they know that they have taken risks but also knows the potential returns they could enjoy after some time.
2. Avoid NFOs If You’re Not Expert
New Fund Offerings (NFOs) mostly comes when stock markets are in bull run. And every good or bad mutual fund was a NFO once but still NFOs are mostly advised to avoid. If you go to the any financial expert for any NFO advise, most probably you will be advised to avoid. You might be having a big question right now like “What’s wrong with a NFO? ”
When an investor have choice to invest in a mutual fund that has long history and date that you can see how it performs during bull runs and bear market. An old settled fund have an open portfolio so that you can see which stock they have picked. Also you can see the data of any old mutual fund’s assets under management(AUM) to get an idea about investors confidence on the fund. High AUM means high confidence on fund.
A NFO lacks all this, but it will advertised as “best fund” marketing agencies and these marketing agencies are best in their work.
3. Have Proper Knowledge Of Focused Funds And Thematic Funds Before You Invest.
See, we all ready have a written an article about focused and thematic funds. You can read that article. Link is below.
But if I tell about both the type of funds in brief, both funds fell in high risk fund’s category and can give you high returns but if one choose wrong fund at wrong time, it can make your portfolio bleed(means high negative returns). This can overshadow your portfolio’s returns too and make overall portfolio’s returns nagitive.
Well, it’s obvious that one should have proper knowledge before investing in focused or thematic funds.
4. Don’t Run Behind ‘Top Past Performer’ Funds.
Well, believe me, that’s a very common mistake that mutual funds investor make. Everyone wants the highest returns and look for best performing funds.
Let me tell you that running behind best past performer fund is a title which is tend to change. You won’t see same mutual fund becoming best performing fund every year.
So if one runs behind the best fund of last year, and invest money in, basically not going to make good returns.
Why? Because the best is over or about to end. Market don’t move upwards only. It moves downwards too. When you see big rallies, you will see some correction too. And the stocks the best performer fund is holding, might not go upwards more.
So what’s advise to do?
One investor who is investing for a longer period of time should not look for best performing fund but instead look for the constant fund. Fund that give better returns than the benchmark in bull runs and give low negative returns than the benchmark.
5. Don’t Try To Time The Market.Try to understand difference between stocks and mutual funds.
See, those who sell mutual when they start getting good returns and ‘book profits’ misses the opportunity of compounding returns
Buying stocks at the low price and selling it high is a common practice and that fine. Mutual funds are not made for the same practice. Mutual funds meant to give good & compounding returns in a longer period of time.
6. Have A Goal Before You Start Investing.
Having a goal is most important part and one must have a goal before making a portfolio. A investment portfolio goal can be a part of your financial planning like children’s education, buying a home, buying a car or it can be for wealth creation.
See, it’s much better to have a goal because than you will able to calculate monthly investment amount you need to invest and also you will get to know long you need to invest.
7. Don’t Be A Mutual Funds Collector.
It might sound silly but I have seen some obsessed people who likes to lots of funds in their portfolio. Adding multiple funds of same category in portfolio. That doesn’t make any sense. Buying same category funds doesn’t mean you’re doing any diversification. Basically it means you couldn’t choose one over all the available funds.
See, one who came to equity markets with money, has one and only reason to invest, to earn the returns.
A good diversified portfolio can be made with 10 to 12 mutual funds.
That’s all I could ask to avoid. This article was for educational purposes. Last decision should be your as you’re going to invest your hard earned money.