Mistakes to Avoid while Investing in a Mutual Fund

A person who only started to write yesterday can't just become Shakespeare tomorrow, right? Similarly, when it comes to investing, most of us hold onto a lot of similar misconceptions and false notions. This ultimately prompts us to take some wrong routes and makes us cause some serious blunders. 

Well, as an investor, you must keep your head clear of all those misconceptions and beliefs. Having a firm hold on reality and employing logic will benefit you a lot more than you could think.  

So in this blog, we will have a quick look at the various mistakes you can avoid while investing your hard-earned money. 

5 mistakes to avoid while investing in Mutual Funds

As humans, we are prone to make mistakes, but some mistakes can be avoided. However, knowing about the possibility of such mistakes, especially in the investing world, can save your portfolio from all those avoidable pitfalls.

Let's take a look at some of the common mistakes investors make while investing in mutual funds:

1. Ignoring financial goals and risk

When you take up an exam, you will have a target in mind when it comes to how much you want to score, right? It might be 35, 60 or even 100 out of 100. This target helps you to stay focussed and be connected with your goal. However, there are also some people who tend to appear for an examination just because the rest are writing it. 

Similarly, a lot of people, when it comes to investing, will fail to align their habits with their financial goals. They might invest aimlessly and thus would ultimately lose control over their investment. Having a goal helps you to stay focused and reach it at a faster phase. 

Also, a lot of people fail to understand the risk that is attached to their profile. Understanding as to how much risk you could take, helps you plan your path better and choose routes accordingly. Taking up more than what you can, will increase the danger of losing everything. 

Now, the goals of each individual will vary. It can be financial independence or owning a house, or providing for children's education; having a goal and aligning it with your risk profile is the first and foremost step in investing and something you cannot afford to forego. Also, it is important to note that a lot of goal-oriented funds are also available in the market. 

2. Timing the market? Never!

It is human nature to see and predict the outcomes of everything and anything. The idea is simple: we don't want to lose an opportunity or get stuck into something that is dire. But if you are planning to employ that skill of yours in the markets, then you are at a loss. 

You might feel that the market is overpriced when it is not. Or you might predict a market crash. However, the fact is that the future is always uncertain. And no wolf of wall street was ever successful incorrectly predicting the market. 

So don't put your efforts into trying to figure the right time to invest or withdraw your funds; rather stick onto the plan which you drafted and religiously follow it. Have a disciplined investment strategy and maintain a calm head. 

3. Reshuffling is not so good

Say you invested in XYZ fund. The next day the newspaper headlines read as follows, "ABC fund has made a 17% return". Your immediate instinct would be to go in for that fund and withdraw from the previous fund. 

Now, it is no mistake to do that. But, it is essential to understand the nature of the funds. This is because certain funds churn out good returns in the long run while others do that in the short run. Also, there is a variety of funds in the market, and each of them acts differently, given the various economic conditions. 

So it's essential you analyse and then take a call, rather than acting out in haste. Additionally, too much shifting and changing and shuffling might be bad for your money. So think patiently before you make any big decisions. 

4. Too much might not be good

Some investors have unrealistic expectations when it comes to investing in mutual funds. Also, most of us, when choosing a fund, try to track the historic returns and go with the one which has a bigger number. 

While it is important to see the historic returns of a particular mutual fund, it is also crucial you see how that particular mutual fund works. This is because certain funds such as thematic funds, no matter how good, may showcase a low return because the entire sector related to that theme was having a low business or had a slow growth. 

So conducting good research is essential, as a result of which, you will be able to understand the real picture of each investment fund.

5. Investing all at one go 

Say you have planted a seed. Now, pouring all the water at one go might harm the plant in the long run. So, what do you do? You pour it little by little. 

The same approach should be followed when it comes to investing as well. It would be a bad choice to put all your money into a particular fund. Though you might look at this as a hassle-free method, this would not be something that is advisable. 

Rather, one should opt for a SIP or a systematic investment plan. This will help you stay calm and composed because with too much money, comes too much fear as well. 

However, also ensure that you don't scatter the money in too many funds. Though it is important to invest in diversified avenues, one should make sure that it is not overly diversified. You can pick 2 to 3 funds focused upon different goals like retirement, education, marriage, etc. and start investing in the same. 

The Bottom Line 

Along with taking into account all the above points, make sure your investment strategy has an element of inflation well planned in it. Also, consistent reviewing accompanied by a proper asset allocation will fast track the process and help you reach your financial goals as soon as possible. 

So, what are you waiting for? Take a pen and a paper and start planning!