Top 10 Mistakes to Know Before Investing in Mutual Funds

With diverse opportunities, mutual funds have become a widely known investment option, an ideal tool to build a strong investment portfolio and achieve various financial goals. Despite these facts, there are still a plethora of errors that people tend to make while investing in them. Therefore, if you are planning to invest in mutual funds, it's better to beware of these common investment mistakes.

Common Mutual Fund Mistakes to Avoid

1. Investing without objective

Different mutual funds have different investment objectives and attributes. Before deciding on your mutual fund scheme, it is essential to define your financial goals clearly. The objective can vary from saving taxes, buying a home after a specified period, retirement plan, child education, etc. Defining and mapping out a precise goal before investing in mutual funds will help you figure out the duration and decide how much money you should put in and in which scheme.

2. Lack of research

With multiple mutual fund options available in the market, it is always a good idea to do the appropriate research before picking one. Also, it is equally important to know the fund type, exit load, historical returns, asset size, expense ratio, etc. along with having a fair idea about your own risk-return profile before you invest your savings in some scheme. It is always better to use authenticated resources to study and research the funds that you plan on investing in, like the Scheme Information Document (SID).

3. Unrealistic expectations

If you are a first-time investor, you might end up having high expectations from the schemes you invest in. Mutual funds definitely have the potential to bring you considerable returns, but you must be aware of market fluctuations and have a holistic picture of the long-term trends.

4. Ignoring risk appetite

Like any other investment vehicle, mutual funds also include some degree of risk. It is crucial to first evaluate your own risk appetite. Each mutual fund comes with a riskometer that tells you how risky the investment option is. Knowing and understanding the scheme riskometer lets you test and analyze your risk tolerance before making an investment decision and try and match the right investment option for you.

5. Investing without emergency funds

The primary mistake many people make is to invest their whole savings in a single scheme. Therefore, during emergencies, you might end up withdrawing money from a scheme that was set for a specific goal. Thus, investing in an emergency fund is essential. It is a fund that you can fall back on in the hour of emergency or for unexpected and unplanned scenarios. An emergency fund cannot be made overnight but is done gradually. Every month, set aside a specific amount in a separate bank account that might grow into a considerable corpus that you desire to redeem during emergencies.

6. Investing in too many funds

Diversification and spreading investment is a crucial step, as it dilutes the portfolio’s overall risk. But this doesn’t mean that you should over-diversify their profile. Buying numerous funds may reduce the overall risk, but it may also hide the fact that there could be a lot of underperforming funds in your portfolio.

7. Short term strategy

It is smarter to have a long-term strategy and mindset instead of a short-term strategy. Having a long-term growth strategy and mindset is important when investing your hard-earned money. Investing for a more extended duration and having discipline could be immensely rewarding.

8. Not diversifying portfolio

If you are putting your money in a single mutual fund, you are exposing yourself to a lot of risks because if the respective company/sector/asset doesn’t perform, you might end up with losses. To aim to get satisfactory returns on mutual funds, diversification is pivotal. This will help to spread out your risk, in case, if some funds are going down, others can gain and balance your loss.

9. Not monitoring regularly

You need to review the performance of your portfolio in a timely manner, in order to keep them aligned with your financial goals. Lack of periodic evaluation of funds can result in keeping the portfolio filled with funds that are not performing well or funds that may be exposed to some kind of risk in the current market, which might eventually pull the portfolio returns down.

10. Avoid taking impulsive decisions

This is a complex mistake that you should avoid. Under the influence of somebody, you should not get into something without understanding or having complete knowledge about it. Also, taking decisions impulsively and opting to exit, in case of a market crash, should definitely be avoided. In regard to the fear of losing the principal amount, you may sell your mutual fund scheme before reaching its goals. So, it is important for you to stay relaxed during market corrections, and monitor the funds' performance for a while before making any decision.

Comprehending the nature of various investments and understanding their risks and return relationship is one of the essential factors that influence investment decisions. Having a thorough knowledge of various types of investments and their expectations is the key to having a good investment portfolio. Once you have invested in a specific Mutual Fund scheme, allow sufficient time for your investments to reap their rewards and track them meticulously.

Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website https://www.sebi.gov.in/intermediaries.html For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.