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8 Mistakes to Avoid When Investing in Mutual Funds

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1. Not investing in Direct Plans

A choice to invest in direct plans of mutual funds is probably one of the great things to happen to a retail investor in recent times.

Direct Mutual Fund plans can be wealth multiplier over the long term (over Regular Funds), thanks to the commissions you save which otherwise go to the intermediaries, had you opted for Regular Plans.

So if you are a Do-it-Yourself type of investor or avail services of a financial planner, it makes all more sense to switch to direct mutual funds.

And with so many Free Online Direct Mutual Fund platforms available, investing in Direct Mutual Funds is now a breeze.

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2.Not increasing your SIP amounts each year

SIP is the best way to become a disciplined investor and remove emotions from your mutual fund purchase decisions.

However, the mistake which majority of us make is not reviewing and increasing the value of the SIPs each year.

If your income level is on a rise, make sure that is reflected in your SIPs as well.

 


3.Investing in too many schemes/ over diversifying

So you have received a salary hike and planning to invest the extra money in mutual funds. Great, that’s a very good decision.

However, it’s better to invest in your existing schemes rather than buying a new fund just because it has been recommended by an ‘expert’.

Remember, over diversification is probably the number one reason why many retail investors experience sub optimal results.

Ideally, for a retail investor, investment in 4 to 6 mutual funds should do the work. Anything above and you are at the risk of spreading yourself too thin.

I committed this mistake when I ended up having 17 schemes in my mutual fund portfolio. I had to take advice of an independent financial planner to decide the best schemes for me.

 


4.Not reviewing your mutual fund investments each year

So you have religiously invested in the mutual fund schemes via the SIP route. Good.

But don’t forget to review the performance of your mutual fund schemes, atleast once an year.

I am not suggesting to switch funds in case of small deviations from the intended results, but a major aberrations repeated year on year is definitely a clue to exit the fund and find a better one.

[If you are looking for professional investment advice, do read my review of Jago Investor’s financial planning services.]

 


5.Staying away from a mutual fund because of its ‘high’ NAV

The NAV of the mutual fund represents the monetary per unit value of the underlying stocks it carries.

A higher NAV suggests that the underlying stocks of that particular fund performed well over time.

It’s no where an indication that the fund has become costly. Remember, there is always a fund manager who’s job is to find more of such opportunities. If the stocks he has selected before have worked well, there is a high probability that he will find more of such stocks.

 


6.Stopping your SIPs when the market is down

Market, like mother nature, is cyclical in behavior.

As an investor, you need to have enough patience to survive through the winters before you can witness the spring.

Stopping your SIPs during a downward market trend is probably the worse financial decision you can take.

Remember, motion and action is not the one and same thing.

In a downward trending market, motion is to stop your SIPs, action is just sitting as it is and waiting for the tide to turn.

 


7.Not making lumpsum investments during market dips

While a SIP ensures investment discipline is maintained, that doesn’t mean buying in lumpsum is bad.

Even though it’s impossible to time the market, your approach should be to buy your selected funds, in lumpsum, if you are witnessing a downward trending market. That way, you average out faster than what your SIPs can help you do.

Obviously, you should have the mindset to face the extra risk in case market goes down further.

In my case, my best mutual fund investments were the lumpsum investments which I made during the crisis of 2008-09.

I hope the second best would be my investments in 2018.

 


8.Not exploring liquid funds as an alternative to fixed deposits

While the fixed deposit in a bank is a very safe instrument, it gives you no more than 7% interest per annum these days.

The bigger concern is that you need to pay income tax on the interest accrued each year, and that reduces your effective return.

But if you invest in an ultra-short term fund and are ready to face the little risk that comes with it, your return can be higher. An Ultra short fund gives a return of anywhere between 7 to 10%, with tax deferred till you redeem the fund.

If you redeem the fund after 3 years, you are taxed at 20% plus indexation.

Compare it to an FD where you need to pay the income tax based on your current tax bracket, that too each year.

 

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Tushar Jain

Tushar Jain

Tushar Jain is a personal finance enthusiast who loves to talk about money, savings, investments and spending. He blogs about financial wisdom and income growth habits at this blog jaintushar.com. Contact him to say Hi.

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