Mutual fund investors alert! The equity market has attracted many investors, most opting for investment through various mutual fund schemes across small, mid, large, flexi, and balanced categories. However, there are common mistakes that investors tend to make when investing in equity mutual schemes. Livemint spoke to personal finance experts about some of these major mistakes.
1) Investing without setting financial goals
Your investments should always be tied to specific financial goals. These goals could include education and marriage for your children, purchasing a house, taking a foreign vacation, or planning retirement. Wealth creation can be a valid objective if you don’t have a specific goal.
“The product for investments will differ depending on the tenure of the goal, as well as its criticality and flexibility. A foreign trip or house purchase can wait, but not the education or marriage of your children. Since one has to move the accumulated corpus in equity to a safer product as the goal nears, this cannot be done unless the investments and goals are linked,” said tax and investment expert Balwant Jain.
2) Chasing returns rather than financial goals
This refers to making investment decisions based solely on the potential for high returns without considering how those returns align with one’s broader financial objectives.
“Instead of focusing on achieving specific financial milestones or objectives, investors may prioritise investments that promise quick or high returns. This approach can be risky because it often involves taking on more risk than necessary or investing in assets that may not align with one’s long-term financial needs,” said SEBI registered tax and investment expert Jitendra Solanki.
3) Trading in mutual funds
It involves frequently buying and selling fund units to book regular profit, rather than hold onto investments for the long term.
“While trading can generate short-term gains, it may not be conducive to long-term wealth accumulation. Constantly buying and selling mutual fund units can result in higher transaction costs, taxes, and potential capital gains liabilities,” said Pankaj Mathpal, MD & CEO at Optima Money Managers
4) Trying to time the market
Pankaj Mathpal notes that many investors tend to panic when the market corrects. They often withdraw their investments and stop their ongoing systematic investment plans (SIPs) for fear of further decline.
5)Non-diversification
While making investments, one should diversify across asset classes, such as equity, debt, and gold. “If you follow the principle of asset allocation and rebalancing periodically, you can certainly maximise your returns. So if one does not follow the asset allocation, even one major correction in the asset class may wipe out the profits and result in losses, and different asset classes do not always move in the same direction,” explained Balwant Jain.
Solanki pointed out the absence of asset allocation, with investors solely focusing on a single asset class that appears to be performing well. They shift from one asset to another class when the markets are high.
6) Expecting unrealistic returns
The recent rally in the Indian stock market has led people to believe that equity can always provide exceptional returns. Balwant Jian emphasised the importance of being realistic about the returns generated by mutual fund investments. According to him, equity mutual funds should ideally provide around inflation + 6% return in the long run, and investors should be content with that.
7)Not reviewing your investments
Balwant Jain emphasizes that reviewing your investments periodically is crucial in your investment journey. However, it’s important not to over-review. Checking the performance of your equity schemes every month and taking corrective steps can be harmful. Ideally, you should review them once a year.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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