Investors across different asset classes, including equities, debts and real estate, are facing a tough situation in the present market condition. It’s high time to practise strict investment discipline to avoid unnecessary losses. While mutual fund schemes are believed to be a comparatively safer option than a direct investment in equities and bonds, a mistake, especially in such times, can cause irreversible damage to your portfolio.
So, to ensure you tread on this path cautiously, here are a few serious mistakes you should avoid while investing in different mutual fund products.
Exiting a fund when the market is down
People who invest in equity-oriented mutual fund schemes need to be patient and keep a long-term view. Currently, the net asset values (NAV) of several mutual funds are plummeting, at times making record lows in line with the overall negative sentiment impacting equity markets. However, the equity market has witnessed several ups and downs in the past, and so it is expected to overcome the current situation as well.
However, if you exit an equity mutual fund investment by booking a loss in the current market in a huff, it may take you a long time to recover your loss by investing in any other asset class.
One of the fundamental rules of investing in equity products is to buy on lows and sell on highs. As such, you’ll be well-advised to try to hold on to your existing equity fund investments. Also, don’t stop your ongoing Systematic Investment Plans (SIP). SIPs can actually help you get a better rupee cost averaging benefit in the falling market.
That being said, if the value of your fund has fallen more than its peers, you should consult with your investment advisor to identify if you’ve made an investment in a bad fund and if there is a need to replace it.
Investing in a high-risk fund for a short term
One mutual fund product may not suit all types of investment goals. So, while investing in a mutual fund scheme, you should try to match the features of the fund with your financial goals. For long-term goals, you may opt for a fund with a high risk and high return feature. However, for short-term goals, you should ideally opt for a fund which offers a moderate return while keeping the risk factor under check.
Some people make the mistake of investing in high-risk mutual fund schemes (like an equity fund) for short-term purposes. And when they face market volatility later, they exit the investment after booking a loss. As such, while selecting a mutual fund, you must try to align your investment with your risk appetite, return expectation, liquidity requirements, and the purpose of the investment to meet your financial goal in a timely manner.
Not checking the cost of investment
Depending on the type of mutual fund you invest in, you may need to pay an expense ratio while investing and an exit load while exiting the investment. While some of these costs are unavoidable, you can implement measures to check the costs and boost your returns. In the same vein, a high cost of investment can damage your overall returns in the long-term if not taken care of at the beginning.
As such, it’s crucial to factor in the cost of the investment to maximise your returns in the long term. You can minimise the cost by taking steps like opting for direct schemes as opposed to regular schemes, fixing a low fee for an investment advisor, investing in a passive fund for the long-term, so on and so forth.
Over-diversifying your portfolio
Some investors have the misconception that the more you diversify, the lesser is your overall risk. However, in doing so, they spoil the overall returns on investments by over-diversifying the portfolio as the risk-correcting marginal loss on ROI exceeds the marginal benefit of risk reduction.
Over-diversification also makes it difficult to manage several funds at the same time. So, you’ll be well-advised to keep the number of investments in mutual fund schemes restricted to such levels that you can easily manage them and it doesn’t hamper the ROI.
Locking money in ELSS after exhausting the 80C threshold
The Equity Linked Savings Schemes (ELSS) are excellent tax-saving investment products for people who are looking for a high return and are ready to take some risk. However, ELSS funds come with a lock-in period of three years, and there is a cap of up to Rs 1.5 lakh to get the tax deduction benefit under section 80C of the I-T Act. If you invest more than Rs 1.5 lakh in an ELSS fund during the relevant financial year, you won’t get any tax benefit on the excess investment amount.
So, you should not invest in an ELSS fund and give away liquidity when there are many other regular mutual fund schemes available in the market that can give better returns with higher liquidity.
In conclusion, it’s important to stay away from committing these rather common mistakes while investing in mutual funds to ensure you meet your financial goals on time. You can do so by reviewing your investments periodically, consulting with your investment advisor and taking informed steps to rebalance your portfolio (by adding or removing products) if required.
Adhil Shetty is the CEO of BankBazaar.com Read Adhil Shetty's columns