Mutual Funds | July 05, 2017
In the recent time, amidst the talks of expensive valuations, liquidity driven rally and so on, one question that clouds people’s minds at large is ‘have I chosen the right mutual fund?’ This question primarily arises when investors are not patient and disciplined in their investments and also fail to choose funds vis-à-vis their financial goals and requirements. So, today, being a responsible brokerage house, we are going to caution you from committing 5 common mistakes that lead to market risk and thwart the investors from making money in mutual funds.
Don’t get greedy: Needless to say that due to the lure of making more and more money, people often go greedy about the investments. They think the more the money they will invest, the more the wealth they will create. And this thought leads them to invest a huge sum when the market is on an upswing. They put all their money, as much as possible in equity mutual funds or in the category that offers the highest return and this inevitably results in a huge money loss. So, what we suggest is stick to your goals and allocation. If you have allocated your money to equity fund to achieve your long-term goals, then stick to it. Don’t alter other investment plans just because the stock market has beaten them.
Don’t panic: Well, you may think that why would someone panic if there is exuberance in the stock market. In this context, we would say that change is the only constant thing and you cannot expect the stock market to flow in the same way ever after. After all, there is always a buyer for every seller. So, buying and selling in the stock market is an uninterrupted phenomenon. But you should not get anxious if investors talk breathlessly about the performance of the market. Sometimes what comes to our notice is even the tiniest sign of a reversal in the market trend skips a thousand heartbeats. Certainly, this is not a right approach towards the investment. If you have invested with a long-term plan, you are bound to go through various phases of the market. Hold your nerve and stick to your fiscal plan.
Don’t chase the returns: It is now common to see that a large number of investors are willing to invest in micro cap funds owing to its quick and impressive returns. Whether a newbie or a conservative investor, everyone now eyes on micro cap funds. But what we suggest is you should be sure about your risk-appetite and stomach for volatility before investing in micro cap funds. In case, you have neither of them then better stay away from these funds.
Don’t choose dividend option over growth while addressing long-term goals: If you aim at growing capital in the long run, then it is best to avoid dividend option over growth. The dividend option does not reinvest the profits further that are made by the fund. Rather, it is given out to the investor at regular interval. This at the end eats up your accumulated profit and leaves a negative impact on your path to long-term wealth creation.
Don’t make it difficult to handle: Imagine how difficult it would be to hold 10 shopping bags at a time. Similarly, adding too many schemes in the portfolio will trouble you to track at regular intervals and would also harm your wealth creation plan. We agree that diversification is the key principle in the mutual fund investment but too many stocks in the portfolio would add no value and may dwarf the potential of your portfolio to generate wealth.