Mutual funds are increasingly accepted by various investors in India because of their lightness and their performance. This financial instrument is suitable for all types of investors, small, medium or large because it can use the Systematic Investment Plan (SIP) to invest in mutual funds of an amount between 500 and an infinite monthly and quarterly or yearly. You can also choose between equity funds, debt funds and balanced funds that invest in equity, debt, equity and debt. The return on investment can be significantly higher. However, if you make mistakes knowingly or unknowingly, you may be in rough water. These are some of the mistakes that you should avoid when investing in mutual funds.
Investing in an instrument, whether its stocks or mutual funds, should be in line with the financial goals you need to achieve. However, most private investors in India are guided by family and friends and not by financial goals which end up making bad investment decisions and therefore losing money. So be sure to set a goal and allocate your finances accordingly. Assuming you want to set up a fund for your child’s higher education, you can start SIP from various funds to build up a large wealth that would be needed 20 to 25 years later from the birth of your child. However, be sure to choose funds based on your past and get more returns. Current performance to stay on the safe side. If your retirement period is 5 to 6 years, you should try to invest in balanced funds.
The most common mistake people make in general is ad hoc investments based on tax-saving criteria. Most people invest in the Equity Linked Savings Plan (ELSS) because it is tax-free with a short blocking period of 3 years. Yes, you can save tax, but investing a lump sum in ELSS can expose your money to various market risks, depriving you of the benefits of the average rupee costs, which are a common feature of investing in mutual funds of placement. The tax saving aspect should match your investment goals, which will then be determined by your financial goals.
Avoid the mistake of investing in mutual funds without having an idea of the budget you can afford. Investments without a budget can make a deep hole in your pocket and make your financial life worse. Make sure you create a detailed investment plan for mutual funds after considering monthly income and expenses. You can choose to use the annual bonus or gifts wisely in addition to the monthly mutual fund salary.
The savings can vary depending on the type of income and expenditure of the people, and some find it difficult to save up to 10%, while others manage to save around 50% of their income. Therefore, assess the amount of savings you know and make the appropriate investments.
People often depend on and invest a lot in mutual fund returns without really assessing their risk profile. Assuming you have a risk aversion, you can better avoid investing in equity funds because they are volatile in nature. Risk-averse investors can invest their money in debt securities and benefit from the returns. You should also know when they need the funds. Assuming it doesn’t take 5 years, you can choose the equity fund option. However, if you need it during this period, you can park your money in debt securities.
Investors invest in too many funds to diversify risks. However, they do not decipher the fact that a single fund is designed to diversify risk by investing in different stocks such as stocks, bonds, and money market instruments. By putting money in a lot of mutual funds, you don’t necessarily have to diversify the risk. If you want to diversify the risk due to the underperformance of a particular fund, it is best to divide your investments into a few funds. Choosing a large number of funds increases the likelihood that a large number of funds in your mutual fund portfolio will underperform, which can lead to low returns. If there is a lot of money, several SIPs are also deducted on different dates of the month. Therefore, you may not have sufficient funds in your bank account to pay SSP on certain dates. You can easily manage SIP payment if you only select a few ways.