Avoid 3 Common Mutual Fund Investment Mistake

With markets in a steady rally for over 12 months everyone seems to be happy. AMCs and distributors are seeing good inflows. Investors seem to be in jolly mood too owing to the general market sentiment and they are being told with a sense of urgency that "now" is the time to invest.

But in the upbeat scenario there a few mistakes that every investor must avoid at any cost. Of the common mistakes made by investors in mutual funds, these few are repeated over and over again. The good thing is, they can be easily identified and avoided, to ensure investors don`t turn out to be their own enemies!

Classic mistake #1: No goals linked to investments

The fundamental mistake anyone can make while investing in mutual funds is to buy a fund for any other reason than the fact that it suits their requirement. This automatically leads to the need to first identify one’s financial goals. Depending on our life stage and financial background we would have short, medium and long term goals. The type of asset class (equity, debt, gold or a mix of these) that can cater well to these time-based goals are different.

Before plunging into buying a mutual fund it is advisable to garner enough knowledge about basics like gauging your risk appetite, need for asset allocation and diversification. This mistake is all about how investors go wrong in their choice of fund category.

Classic mistake #2: All that matters is... past performance

Too often past performance is the only metric that investors pay attention to. No doubt, performance is the bottom line for your investment however its attractiveness should not blind you from considering other aspects of the fund. Is the performance consistent? Is there a predictable pattern of performance in the different market cycles? Does the fund have solid backings of a team-based approach (as against star fund manager approach), reliable sponsor company? All these factors contribute to a fund’s pedigree and matter for your long term investments.

Chasing performance alone can prove quite expensive. A good example of this is how investors run after mid cap and small cap funds, often with poor understanding of the risk they are taking upon themselves.

The saying goes “looks catch attention but character catches the heart”. This can be a principle for investments too. Short term performances never fail to impress people and grab headlines but it is best not to let it grab your money unless you see virtue in it.

Classic mistake #3: More funds = diversification successful!

The concept of diversification is misunderstood by many investors. They assume owing many different funds will do the job of diversification. Unfortunately this is far from true and only leads to clutter. A cluttered portfolio becomes difficult to manage and keep track of.

If an investor owns 10 different diversified equity mutual funds he’d find that the overall portfolio of stocks is quite overlapping. This might even result in overexposure to certain stocks. We believe a fund of funds is a better way of achieving diversification within an asset class.

But then the reason some investors hold too many funds in their kitty is the “between the devil and the deep sea” dilemma we all probably face at times. We did not want an investment because we were sure either did not suit our need or was not a decent performing one but there was no way we could have turned down the friend/neighbor/uncle without harming the relationship! We must find a polite way out of such situations, if needed.

So go ahead, do your homework and stay focused without feeling the need to compare your investments with a friend’s or colleagues. Because our individual needs are often unique. Take the assistance of a financial advisor who can guide you in creating a strategy, understanding products and keeping tab on investments already made.

Above article is authored by Quantum.

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