Five mistakes people make when investing in mutual funds

Over the past few years, mutual funds have become more popular. Most people are either investing in a mutual fund or know someone who has invested in a mutual fund. You could be one of those folks who are curious about how to invest in mutual funds. Maybe you’ve heard some things from your friends and want to learn more before jumping into mutual funds. While you might think most people know about investing in mutual funds, it’s not so. People make mistakes when it comes to investing in mutual funds, and we are here to explain that so that you don’t make the same mistakes.

1. Not understanding your goals

Before you invest in a mutual fund, you must have a clear understanding of what your investment goals are. Are you looking to generate wealth or income? Do you want money within one year or after 10 years?

If you don’t know what type of investor you are, then it’s unlikely that any mutual fund will meet your needs.

2. Focusing too much on past performance

When they want to invest in mutual funds, most people search for ‘best mutual funds’ on Google. But is that the right way to select a fund? We do not think so.

It is important to not get caught up in the hype when choosing mutual funds. If a fund has topped the one-year charts, it doesn’t mean it will continue doing so in the future. While past performance has its own place in helping us shortlist a fund, it is not the only criterion.

Mutual funds have different investment objectives, so they will not all perform well all the time. You should focus instead on what kind of returns you expect from a fund over time, based on its objective and history, rather than obsessing over whether it was up or down last month or last year.

Moreover, we can compare the fund’s performance with its peers, especially when the markets are trending downward. A fund that has performed better than its peers will be considered the better fund.

3. Investing too much money at once

Most people make the mistake of investing too much money at once. This can hurt new investors who invest without a clear understanding of mutual funds. For instance, let us assume that you invested Rs. 5 lakhs in an equity fund, and the market suddenly drops 10%. Then the value of your portfolio will come down to Rs. 4.5 lakhs. And this gives jitters to many people. 

So, if you are a new investor, we suggest you avoid lump sum investments. Instead, you can look at Systematic Investment Plan (SIP) as the preferred investment mode. You can start with a minimum investment of Rs.500.

4. Not paying attention after investing in a mutual fund

It’s easy to buy into a mutual fund and then forget about it until it’s time to sell. Still, this approach isn’t always wise because the market can fluctuate dramatically over time — even more so than individual stocks! You should regularly check the performance of the funds against their benchmark and peers. If the fund has been in the bottom quartile for four consecutive quarters, it might be a good time to look into the matter.

5. Redeeming mutual fund units when the markets are down

When the stock market is on a downfall, you may find it difficult to resist the temptation to pull out your money and invest it somewhere else. However, it’s important to not make rash decisions when the market is going through tough times; this is because equity mutual funds are designed to be long-term investments and typically don’t fare well if you are trying to time the market.

All these mistakes are easy to make, so you must remain diligent. The worst thing is you waste a little of your money. But when it comes to the investment you’ve been looking forward to for your future, it is worth the effort to ensure you don’t make these five common mistakes.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. 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. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.