Investing in Mutual Funds: Are You Making These Mistakes When Investing in Mutual Funds?
According to industry reports, the mutual fund industry is growing very rapidly and thousands of new systematic investment plan (SIP) accounts are opened by investors every month. One of the reasons for investing in mutual funds is the opportunity to earn through the power of compounding. However, experts say, even though mutual fund investments are on the rise, most people are unaware of the common mistakes they make when investing in mutual funds.
Here are some common mistakes that mutual fund investors should be aware of:
* Over-diversification – Going for many schemes is one of the most common mistakes investors make in the name of diversification. It is important to diversify a portfolio while investing in mutual funds. However, adding too many diets is not the right way to go. Experts say having too many programs in a portfolio only increases the burden of monitoring them.
Ideally, only invest in a few programs that provide exposure to the entire market. You could build a portfolio of 2-3 well-managed programs, which will also be easier to follow.
* Speculate and time the market – To maximize returns, some investors sell their investments when the markets are high, but this isn’t always the case – only a few are lucky. Chances are, it won’t work for you.
Experts say one of the biggest mistakes investors make, especially new investors, is trying to time the market. The right approach to investing in mutual funds is to invest in them at regular intervals, through systematic investment plans (SIPs). With SIP, the investment also has the opportunity to grow over the tenure in a disciplined manner.
* Focus on asset allocation – Asset allocation is necessary when investing, as investors need to determine the proportion in which to invest in different asset classes. However, asset allocation depends on certain determinants such as financial goals, years remaining before maturity, risk appetite, etc. gold and real estate, among others.
* Put all the money in one place – Investing in mutual funds becomes tricky if you invest all your money in one place. Therefore, investing a large amount of money in one place is not a good idea. Take a phased approach to invest in the right direction, while avoiding exposure to timing risks.
* Ignore the risk profile – We are all driven by the fear of missing out. Likewise, in a bull market, investors ignore their risk profile and under peer pressure invest in risky avenues. However, this is one of the biggest mistakes. Industry experts say that while one is saving for a goal, he / she should stick to it.
* Do not review the portfolio – It is generally suggested that an investor monitor the performance of their investments at regular intervals, i.e. at least once or twice a year, but most of us don’t.
To avoid barriers to their wealth creation, in the long run, an investor should conduct a periodic review of all of his or her mutual funds. This will help them to know the underperforming funds in their portfolio, so that they can get rid of them in time.