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Avoid these investing mistakes to create wealth through mutual funds

Sep 23, 2018 / Pratibha Chakrabarty | 71 Downloaded | 5662 Viewed | |
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Mutual Funds is a way of investing ones savings into a pool of funds that goes into various assets like equities, debt and gold etc. depending on the fund choice made by the investor. One can go for investing in equity Funds, debt funds, hybrid funds, tax saving funds, retirement funds or gold funds etc. depending upon the investor’s investment objectives and also the risk profile.

The confusion in choice generally lies in the types of equity and hybrid funds or debt funds to be selected, the time period of investment and the goal/s which one is working towards. All these questions are rather pieces of same puzzle which need to be selected carefully after research in order to give you the perfect picture. The major reason why people invest in Mutual Funds is to create wealth so that they benefit from higher returns compared to other asset classes. However, in order to do so, one should avoid these common investing mistakes.

Unaware of financial goals

Travelling without a destination does not make sense, does it? Similarly, investment in mutual funds without a goal or investment objective does not make sense. One must be aware as to why one is making the investment so that they can customize the investments accordingly. Suppose, you are aiming to create a corpus of Rs 10 Lakhs after 5 years for purchasing a car, then, you need to start a monthly SIP of Rs 12,100 in an equity fund of your choice (assumption based on 12% annualized returns) – Please refer this tool https://www.advisorkhoj.com/tools-and-calculators/target-amount-sip-calculator

While this is obviously calculated at an assumed annual rate of 12%but you also need to factor in inflation. For example – If you factor 6% inflation, you need to save for a corpus of Rs 13.38 Lakhs in lieu of Rs 10 Lakhs and in that case the monthly SIP amount goes up from Rs 12,100 to Rs 16,200. Accounting inflation is the most important part while planning a goal.

Like the above example, you may have different goals to achieve at different points in life. Planning for each goal after accounting inflation is must. If you have a regular monthly income by way of salary or business income, monthly SIPs could be the best way to achieve your long term or short goals.

You must read how to achieve financial goals through right asset allocation

Ignoring risk profile

One must always make investments that suit their risk profile. If you are a high risk taking investor, then you can go for equity funds like multi-cap funds, mid cap funds or small cap funds. However, if you cannot sustain high risk, maybe debt funds are ideal investment option for you. Those who can take moderate risk, hybrid funds or large cap equity funds could be very good choice.

As an investor you may like to know which fund is suitable to your risk profile. It is simple – Each fund comes with a Risk-O-Meter which you can refer to while selecting the funds. Mutual Funds are categorized into 5 Risk levels – Low, Moderately Low, Moderate, Moderately High and High.

If you are risk averse, understand your risk capacity

Selecting a fund matching to your risk profile is the utmost important thing. If this is not kept in mind, you might suffer losses from the investments which might not perform in a way that you anticipated or perceived. Thorough research should go into it or before making mutual fund investments or you can take help of a mutual fund advisor.

Periodic portfolio reviews not done

The task of an investor does not end right after making a mutual fund investment. One must review or track the respective fund performances at least annually. The periodic review makes sure whether the portfolio is performing as expected and the investor is on track with long term goals. If the portfolio is not performing as expected, investor must get out of the non-performing funds and replace with the performing ones. If the annual reviews are carried out seriously, there is no reason why the investor will not be able to achieve the various investment objectives.

Would you be interested to know how to get more returns from your mutual fund investments

Sufficient research not done

Research undertaken before investing in mutual funds can make or break your investment choices in the market. One must know the category of funds available, the track record of the fund managers associated with it and the long term performance track record of the fund.

Did you know what is the importance of past performance in selecting the best mutual funds

Investors tend to invest in a fund which has performed well in the recent past but that is a common mistake. The investor must go with funds which have proved its mettle over the long term and created wealth for the investors. Did you know How to select best mutual funds

Investing in SIPs for a short term

The longer one invests for, the higher the returns from investment are expected to be because of compounding of returns. A common mistake made by investors is to simply stop their SIPs when the fund does not perform in the desired way or when the markets are falling. Well, markets have their highs and lows due to which the funds might not perform excellently all the time. One need to understand that continuing their SIPs for a long period of time is must in order to yield better results from the same. If one panics from market lows / or volatility and stops the ongoing SIP, the investor might suffer losses. In fact, continuing the SIPs when the markets are falling or volatile helps you accumulate more units as the NAVs will be lower.

Did you know on which date of the month you should start your SIPs and also the benefits of starting a SIP in mutual funds

Avoiding investing in tax saving schemes

Generally investors relate investing in mutual funds with open ended equity mutual fund schemes. It is ideal if you can plan your investments basis your tax saving requirements. For example – You need to save Rs 10,000 per month for meeting a long term goal and you also need to reduce taxes. In this case, instead of an open ended equity fund, you can invest in ELSS mutual Funds. ELSS mutual funds are equity funds only but they help you save taxes too! Investment upto Rs 150,000 per annum qualifies for tax rebate under Section 80C of The Income Tax Act 1961. ELSS funds are locked-in for 3 years from the date of investment.

Read what the benefits of investing in ELSS Mutual Funds are

Conclusion

There are plenty of options and opportunities to create wealth out of investment in mutual funds. If one avoids the above investing mistakes and takes wise decisions with regards to mutual fund investing, he/she can surely achieve financial goals through mutual fund investments. You must consult a mutual fund advisor and seek his/her professional help. You should also discuss with you mutual fund advisor these 5 strategies which can make you a successful mutual fund investor

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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