5 common mistakes to avoid while investing in mutual funds

While investing in mutual funds, investors get the opportunity to earn more through the power of compounding over a period of time, as compared to other investment options such as fixed deposits or recurring deposits. The investment can be either through SIP or lumpsum.

A report from the Association of Mutual Funds in India (AMFI) states that currently Indian mutual funds have about 2.89 crore SIP accounts through which investors regularly invest in MF schemes, and on an average, 9.35 lakh SIP accounts have been added each month during the FY 2019-20, with an average SIP size of about Rs 2,850 per SIP account.

However, even though investment in mutual funds is rising, experts suggest many people are not doing it right and they don’t even know where they are going wrong.

Here is a list of some of the common mistakes made by investors, which should be avoided:

Asset allocation – This is the first step where most investors go wrong. Asset allocation is the proportion in which an investor needs to invest his/her money in various asset classes. While determining asset allocation, investors should focus on their financial goals, time left to reach that goal and their risk appetite.

Additionally, while investing, a portfolio needs to be diversified across various asset classes, which should include equity, gold, fixed income, and real estate, among others.

Investing in one place – Investors should not put all his/her money in one place. It is not a good idea to invest a large sum of money in one place. Doing so can become tricky for the investor. It is better to take a staggered approach while investing. Ideally, investors should opt for a few schemes that offer exposure to the overall market.

Investing in too many schemes – While an investor should avoid putting all his/her money in one place, they should also avoid investing in too many schemes. In the name of diversifying a portfolio, this a common mistake made by many investors.

Even though it is necessary to diversify a portfolio while investing in mutual funds, one should not add too many schemes to one’s portfolio. This increases the burden of tracking them. Alternatively, investors should invest in two or three well-managed schemes, which will also help them keep track of those investments easily.

Timing the market – This has made many investors lose all their money while investing in mutual funds. Trying to time the market is one of the major mistakes investors make while investing in MF.

Most investors aim to sell their investments when the market is high to maximize their returns. However, only a few turn out to be lucky. The right approach to investing in mutual funds is to invest at regular intervals (through SIP). This way the money grows over the tenure of the investment.

Review your portfolio – Many investors start a SIP or invest a lump sum amount of money in mutual funds and forget about it. However, it is necessary to keep track of the performance of the investments at a regular interval. Industry experts suggest, investors should conduct a periodical review of all their MF schemes to avoid obstacles in their wealth creation, in the long run. This way investors can also get rid of funds that are underperforming and invest the money in a better place.