Mutual Funds as a form of investment instrument has gained
prominence in recent times.
This can be attested by both, the number of new investors as
well as the ballooning AUM.
Considering mutual funds is still at a novice stage, it is
only natural for investors to be still at a learning stage.
Mistakes therefore should not come across as an aberration,
listed below are some very common mistakes that investors commit.
Having No Goals
Investing without having specific goals is quite common and
a recipe for disaster.
When you have set goals, you know where you are headed and
are motivated to stay the course despite the ups and downs that accompanies
an equity investor.
You are motivated by reaching your goals and not by greed.
Having goals also help in other aspects of life, for eg. If
you are investing for your child’s higher education then you do not need to
worry about that specific aspect at least while worrying about other life goals
like purchasing a house, retirement, etc.
Another helpful part about having goals is that it helps in
constructing a portfolio, longer the time horizon, higher the risker appetite
and if shorter the time then lower the risk appetite.
This helps in clarifying whether you need to look at
equity, debt or hybrid and within these categories too, what type of funds
depending on the time horizon.
Trading
Unfortunately ‘Profit Booking’ as a concept along with
redeeming for non- emergency reasons is quite rampant.
According to a study by Axis Mutual Fund 48.70% of equity investors redeem their portfolio within 2 years or less.
This basically sheds light on the fact that most investors
are basically traders in the garb of investors.
As previously mentioned you should have goals when investing
and that is what should keep you motivated, not short term profits.
If you cannot stay put for the course and delay
gratification then maybe equity investing is not your cup of tea.
Unrealistic Returns
The first step in risk assessment is understanding your
ability to withstand negative periods of investing.
If at any given time you cannot hold your ground if your
portfolio takes a -50% dive then maybe you need to revisit your idea of equity
investing.
Post covid the equity markets have been on the up and ever
rising but they too will have moments of uncertainty and turmoil.
This is not a predication but rather the nature of equity
markets.
Taking into account all the above points it is only prudent
that you keep your expectations realistic when it comes to equity returns, as
long as your portfolio is able to beat inflation and traditional fixed income
instruments then you are on the right path.
One must be optimistic when it comes to equity investing and
future growth but the optimism must be rooted to the ground at all times.
No periodic review
A mutual fund portfolio must be reviewed periodically, ideally once a year.
This review should be undertaken by a qualified professional
or else it would be a futile exercise.
A periodic review helps to confirm if the goals and your
mutual fund portfolio is still aligned and on track.
This is important because mutual funds could go through
several changes like change in category of fund, restriction in amount,
strategy, aum, etc.
It is not a given that you would need to alter your mutual
fund portfolio due to reasons mentioned but you would need to review if any
changes are warranted.
Timing the market
You cannot time the market, no one can.
In case you ever encounter anyone stating anything to the
contrary then you might want to take a run.
Often investors who in reality are short term traders make
long term portfolio decisions based on short term events.
Investors have often been guilty of ceasing their sips when
the markets are volatile with the intention of starting them again once the
market stabilizes.
This defeats the very purpose of investing via sips in the
first place.
Chasing the star fund
No one fund or fund house stays permanently at the zenith
with respect to returns.
The baton keeps on passing from one to another, this should
not be interpreted as every fund or fund having the ability to possess the
same.
Investors have often been guilty of chasing the in vogue
fund, this can be attested by the sudden
surge in aum of the scheme.
The fallacy of such behavior is that you would end up
investing and redeeming frequently cause as previously mentioned no one fund stays at the
top permanently.
This would go against the tenets of equity investing since
you are constantly interfering in your portfolio which also affects the
compounding process.
Another interesting facet of such behaviour is investors
expecting the new fund to go even further higher once they have invested,
conveniently forgetting that equity investing is not linear in practice.
Mistakes are a part of life and equity investing is no
different.
What is different though is that mistakes in equity
investing can be brutal to the point that a very negative experience early
might deter you from investing again for a very long time or maybe even
forever.
Therefore is better to avoid certain mistakes than to learn
from them.
Maybe trying being wise before an experience for a change.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
Copyright © 2024 The Mutual Fund Guide, All rights reserved
