Common mistakes to avoid while investing in mutual funds

Every investor, at some point, makes a mistake when making investment decisions. For many, losing money seems like an unintelligible idea. Sad to see profits evaporate during periods of volatility. Investment mistakes are valuable lessons learned in the investment field.

The first mistake is investing without understanding the objectives. Unfortunately, in India, most investment decisions are based solely on recommendations from friends and family who may not be experts in analyzing complex financial instruments. A good financial advisor is essential. He understands his goals and recommends investments that complement his goals. For example, if he is saving to finance his children's education and is 7-8 years old, he might consider creating a diversified portfolio of equity funds rather than keeping his money in debt funds or a fixed deposit.

Another mistake is making personalized investments based on tax savings criteria. Investing in tax saving tools should match his investment goals. While fixed deposits offer tax benefits, the interest received on them is taxable. This reduces returns. If your goal is a few years away from you, it makes sense to invest in equity-linked savings schemes (ELSS) plans that have a shorter insurance period and produce above-average returns over the long term.

Investing without a budget can cost you dearly. Many invest without a clear trend in the hopes of quick rewards. If you don't have a plan, you will be forced to sell your investment at a loss when you need the money. It is imperative that you have an investment plan and stick to it. Part of your savings can be invested in equity and debt funds through a systematic investment plan (SIP). Also, the bonus or gifts can be invested in a large amount. This will help you build a good team in the long run.

Enthusiasm can be bad for an investment. One of the biggest mistakes investors make is investing in too many funds. Often times, in the name of diversification, people end up buying similar funds, undermining the entire diversification goal. For example, large-cap funds have a similar investment strategy. Therefore, debt with a few large funds will produce similar results. Therefore, the risk of the portfolio also increases. Before investing, you should assess your risk profile and invest according to your appetite for risk. Also, instead of investing in stocks or debt, you should invest in different asset classes, such as stocks, debt, commodities, real estate investment funds, and international funds. This helps hedge the risk of volatility.

Volatility can be very troublesome for even the most seasoned investors. This is why financial advisers advise investing in a staggered manner to take advantage of the average cost of the rupee. Another advantage of investing through SIP is that it helps the investor to stay calm and not resort to panic selling during volatile markets. An experienced investor knows that bear markets are always followed by bull markets. Therefore, a well-planned investment strategy can yield great returns if applied diligently.

Finally, investing is not gambling. One of the biggest mistakes is investing with a short-term profit mindset. The same applies when people rush to sell their money when there is a small profit. Unless investment objectives are achieved, you should not be in a rush to sell investments. Remember, mutual funds are wealth-building tools that work best in the long run.

As mentioned above, investing is an art. One should not treat it as something you do yourself and seek the advice of a qualified financial planner to devise a strategy that helps the individual achieve his goals with minimal risk.

Also Read: 10 Safe Businesses in 2021-Business2Business