New to Mutual Funds? Avoid These 4 Mistakes

Regularly saving a small amount over a long time builds a sum of significant value. However, the same amount when invested in mutual funds grows even more with the power of compounding.

At its core, a mutual fund is an investment vehicle in which several investors pool money to earn returns. A professional fund manager then invests the collected money in different securities, like bonds and stocks, to offer potential returns. It is one reason why experienced investors believe ‘Mutual Fund Sahi Hai.’

If you are new to investing money through mutual funds, you might have heard people saying, ‘Mutual fund Sahi hai’. However, mutual fund investing is a tough task to master. It often happens that even seasoned investors commit mistakes, which can be due to a lack of proper planning or the burden of financial responsibilities. With the recent announcement of Union Budget 2020, there are many proposed amendments to mutual fund investment laws. Before jumping on the investment bandwagon to create wealth for your family and achieve several life goals, learn from others’ mistakes to avoid bearing losses and understand why ‘Mutual Fund Sahi Hai.’

Four Most Common Mistakes That Mutual Fund Investors Make

1. Expecting Unrealistic Returns

Out of all the other mistakes that many investors do, this one is the most common. It is because they do not know why ‘Mutual Fund Sahi Hai’. They think of mutual funds as a method of creating colossal wealth in no time. Before you start the investment journey, understand that a mutual fund is not a money-making machine. It is a financial instrument that depends on market conditions to generate wealth for investors. Wise investors say that ‘mutual fund sahi hai’ because they expect realistic returns from their investment. So, setting unrealistic expectations while investing through mutual funds may hurt you in the future.

2. Lack of Investment Planning

It often happens that some investors do not think much about any goal while they begin investing through mutual funds. They just believe ‘mutual fund Sahi hai’ and start putting in money in various funds. However, continuing with this approach forever does not make sense. Once you gain the basic knowledge of related risk and return, it is essential to align your investment strategy with life goals. You should set objectives and follow a planned approach to build your investment portfolio. By doing this, you can avoid underperforming funds and overhead debt.

3. Undiversified Investment Portfolio

Investing in diverse mutual funds is crucial so that you get to understand more about the reasons why ‘Mutual Fund Sahi Hai’. If you put them all your eggs in one basket and it falls, you will lose all of them. Similarly, when you invest through mutual funds into only one sector, unfavorable market conditions may have a significant impact on your portfolio.

Diversifying your mutual fund investment portfolio means investing in funds related to various sectors and companies. This way, you can protect your portfolio against the sudden market fluctuations in some specific sectors. In other words, ‘Mutual fund Sahi hai’ provided you have a diversified portfolio.

4. Investing Only to Get Tax Benefits

Many people invest through mutual funds to get income tax deductions while filing returns. For instance, Equity Linked Savings Scheme (ELSS) investment comes with tax benefits under Section 80C of the Income Tax Act. However, investing only in tax-friendly funds will act as an obstacle to the potential growth of your portfolio. Right choice of funds and systematic planning, which is not based entirely on tax-savings, can maximize returns.

Just as in other aspects of life, it is a wiser decision to learn from others’ investment mistakes than committing them yourself. Your lack of experience in mutual fund investment when paired with the expertise of a financial advisor, can bring great results. The real reason why many investors say ‘Mutual Fund Sahi Hai’ lies in the investment approach.