5 mistakes to avoid while investing in Mutual Funds

Mutual funds have become an increasingly popular investment option, even among those who are unfamiliar with the stock market. This is because not only do they offer a higher return than many fixed income or other financial instruments, but you can also pick and choose the kind of returns you want vis a vis your risk appetite, investment time horizon and financial imperatives. And if you are new to the market, there’s always your friendly financial advisor who can help you understand debt, equity, balanced funds and other such stock market jargon.

However, whether you are novice or a veteran investor, there are certain things to keep in mind before you decide to invest in mutual funds. Here are five of them:

1. No clear financial goals or plans:

   This essentially means you should not invest for the sake of investing because you want to save taxes, or because your friend/relative coaxed you to do so. It is only when you are perfectly clear about your own needs and goals, as well as your risk profile, that your financial advisor can suggest a portfolio for you

2. No budget planning:

   Always be clear whether you can afford to fund your investments. This requires a deep dive into your monthly income and spending patterns and calculating the amount that you can spare for investments without burning a hole in your pocket or being unable to pay for a sudden emergency. Since savings fluctuate from person to person, it is very important to have a clear view of the amount you can afford to allocate for investments

3. Not knowing your risk profile:

   Many people invest in mutual funds based on projected returns, without clearly understanding the risks involved. For instance, if you are risk averse, you should avoid investing in equity funds, which give better returns but are extremely volatile, particularly in the short term. Instead, you should consider debt funds, which offer lower returns but are relatively stable

4. Over diversifying your profile:

   In order to mitigate risk through diversification, many people invest in too many funds. Having a large number of funds, however, increases the chances of having many underperforming funds in your portfolio. Also, each fund is already designed to diversify risk through investing in disparate securities as per the fund’s objective. It is therefore better to divide your investments into a few select funds

5. Investing with a short-term approach:

   Every investment advisor will tell you to invest with a long term horizon, unless you are specifically looking to fund something within a fixed period. Long term investments gain significantly from compounding. Equity Mutual funds are good for long-term investments and thus you must stay invested for at least five years or more to reap maximum benefits from your investments

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.