Mutual funds have grown in popularity as an investment instrument, particularly among individuals who are unfamiliar with the stock market. This is because they not only provide a greater return than many fixed-income or other financial instruments, but you can also choose the type of returns you desire based on your risk tolerance, investment time horizon, and financial goals and imperatives. And if you’re new to the market, your friendly financial advisor can help you grasp terms like debt, equity, balanced funds, and other stock market lingo.
However, whether you are a newbie or a seasoned investor, here is a list of five mistakes to avoid while investing in mutual funds online or offline:
No defined financial goals or plans
This indicates that you should not invest in mutual funds only to save taxes or because a friend or family enticed you to do so. Your financial adviser can only recommend a portfolio for you if you are completely clear about your requirements and goals, as well as your risk profile.
No financial planning
Always be clear about your ability to fund your investments. This necessitates a thorough examination of your monthly income and spending patterns, as well as determining the amount you can set aside for investments without burning a hole in your pocket or being unable to cover an unexpected need. Since savings vary from person to person, it is critical to have a firm grasp on the amount you can afford to set aside for investments.
Not understanding your risk profile
Many individuals invest in mutual funds based on expected profits without fully comprehending the risks. For example, if you are risk-averse, avoid investing in equities funds, which provide higher returns but are very volatile, particularly in the near term. Instead, consider debt funds, which yield lower returns but are more reliable.
Excessive diversification of your profile
Many people invest in too many funds to try to reduce risk through diversification. Having several funds raises the likelihood of having many underperforming funds in your portfolio. Furthermore, each fund is already intended to diversify risk by investing in various assets as per the fund’s purpose. As a result, it is preferable to concentrate your investments on a few well-chosen funds.
Taking a short-term approach to investing
Unless you are trying to fund something in a certain time frame, every financial advisor will tell you to invest with a long-term view. Compounding benefits long-term investments substantially. Equity mutual funds are ideal for long-term investments; therefore, you should stay involved for at least five years or longer to gain the most rewards.
These are a few considerations to ponder before investing in mutual funds, whether via SIP or lumpsum. Once you’ve checked all these boxes, you’ll be in an excellent position to begin investing. And verified investment apps, such as Tata Capital Moneyfy App, make investing extremely easy and safe.