“Mutual Fund investments are subject to market risks. Please read all scheme related documents carefully before investing.”
You must have heard this customary warning after every mutual fund ad ever aired. And yes, investment in mutual funds is risky but with a few smart choices, you can reduce the risk.
In the recent years, the trend of equity or share market investment through mutual fund schemes has increased. Small investors, instead of investing directly in the stock market, see mutual funds as better option.
This reduces the risk associated with share market for the investors.
Five Mistakes That Can Reduce Mutual Fund Returns
Mutual fund investors often make a few mistakes unwittingly and as a result they face low or negative return. Here is a list of 5 mistakes the investors must be wary of.
1. Investing on Basis of Surge in Market
Sometimes, small investors see a surge in the market and feel that this is the most opportune time to invest in the market and make most of it.
But often, if a market experiences a sudden surge it can also experience a slump quickly. to ensure good returns, investment must be timely and consistent.
In case of equity mutual funds Systematic Investment Plan (SIP) provides the options of consistent investment.
On the other hand, investment based on rise and fall of the market increases your risk factor.
2. Being Impatient With Your Investment
It is important to note a crucial point. Equity investments provide good returns. But unlike a fixed deposit at a bank, there is no fixed or guaranteed return every year.
One year you may find huge returns and the next year the returns may be less than that on the interest rates of a savings account.
Hence, financial experts often suggest that invest in share markets or equity funds only if you can patiently wait for 5-7 years. The big players of share market often say that it's better to devote time to the market then attempting to 'time' the market.
Share market has yielded 30 percent returns in last two years and almost 60 percent returns in last five years.
3. Investing in Dividend Options of Mutual Funds
For wealth creation, one must opt the growth option of equity mutual fund and not the dividend option.
Dividend from any mutual fund scheme is taken out from the fund’s Net Asset Value (NAV) which then, reduces your fund’s NAV.
This means that the value of your fund is reduced and you miss out on the chance of getting proper benefits of power of compounding. This reduces the long time returns of the fund which may lead to you missing the financial goal.
4. Investing in Similar Portfolios
Often when investors don't get desired returns from a mutual fund, they start investing in other similar funds. As a result, your portfolio is filled with similar investments which makes it unbalanced. Your portfolio shouldn’t hold more than 4-5 schemes from similar portfolios.
Otherwise you will not be able to gain benefit of diversification in portfolios. Choose good mutual fund schemes and make sure that your portfolio has the right balance of large cap, mid cap, small cap and hybrid schemes.
If you feel that your portfolio has become too big for you to handle then consult a financial expert and create a balance in your portfolio by setting up financial goals for your investment.
5. Making Investments Based on Fund’s NAV
Small investors sometimes feel that investing in a scheme with smaller NAV is more beneficial than investing in a company with a higher NAV. This, is not true.
NAV of a mutual fund scheme isn’t the only parameter to judge its performance.
One must check the past performance of the scheme, the track record of the fund manager and what is the benchmark index of the fund. If you are confused about the right mutual fund scheme then do consult a certified financial adviser.
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