5 Mutual fund mistakes to avoid
With the Mutual Funds market surging in recent times, new investors are coming forward. However, talks about a liquidity-driven rally and expensive valuations can give jittery to the newcomers.
With the underlying assets in a Mutual Fund being debt, equity, and cash in a predefined ratio, a fund manager is responsible for the fund allocation and performance. The performance of a fund depends on the investment philosophy, portfolio composition, the fund manager’s efficiency and market fluctuations among other variables. However, investors often have questions for the financial advisors on how to make their investments more effective.
Here’s a list of five mistakes that investors should avoid making:
1. Planning Without Investing
Mutual Funds offers a portfolio of products for all kinds of investors, which means you have to know in-depth knowledge about the fund, how it had performed in past time & it has to be suitable for you. You must not blindly buy or sell a fund based on popularity or advice from friends or fund advisor.
2. Getting Greedy
Sometimes, when the market is moving upward, investors get tempted and put all their money into the fund that is performing well. This could lead to a skewed portfolio with too much invested in similar funds. Any miscalculation could lead to a huge loss. It’s always recommended to have a balanced portfolio.
3. Churning Portfolio Like Stocks
Do not churn your Mutual Funds portfolio like stocks. Mutual Funds contain a set of underlying stocks and bonds. Selling a fund and buying a similar fund from another AMC would only make it unproductive. It is equivalent to selling and buying the same stock. Moreover, it would involve an additional cost in the form of exit load. Over the long term, these costs add up and might have a detrimental impact on the returns.
4. Looking At Recent Performance To Evaluate Mutual Funds
Most rating companies assess Mutual Funds based on their performance in the recent past. So, the ratings change as and when there are fluctuations in performance. Investors should be careful when it comes to assessing a Mutual Fund’s performance. The best metric to evaluate a scheme is its long-term performance. Evaluate the long-term (five years and above) Compounded Annual Growth Rate (CAGR) of the fund. The longer you go back in time, the better you can assess the estimated returns from a fund.
5. Going After New Fund Offers (NFOs) Without Research
Some investors are very keen on investing in New Fund Offers, assuming them to be having similar potential as that of IPOs. NFOs are certainly new funds but the underlying assets are not always new, unlike that of IPOs.
There is no difference between investing in an old equity fund that puts money in blue chip companies and a new fund that invests in the same set of companies. The return depends on how the underlying companies perform. If they perform well, the net asset value of both funds would go up. However, there are a few NFOs that are based on new sectors, themes, or a new set of companies. Such NFOs have the potential to scale up returns.
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