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6 Mistakes You Should Avoid While Investing In Mutual Funds

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Mutual fund investing is all the rage these days. Many people who previously invested in traditional savings schemes such as PPF and FD are now expressing an increased interest in Mutual Funds.

 

If you don't have much experience studying the stock market, buying Mutual Funds instead of directly investing in equities is a safer and more convenient option. Mutual fund investing is a great tool for middle-class Indians to achieve their desired outcomes. It can be started with a nominal amount of as little as Rs 500 a month.

Regardless of these benefits, many consumers, particularly inexperienced investors, make several blunders when investing in mutual funds. In this article, we'll go through ten of the most common mistakes people make while investing in mutual funds.

Mutual Funds Are Different From Equity Shares

Mutual Funds Are Different From Equity Shares

Buying and selling mutual funds for trading purposes is an investment mistake. A mutual fund can never give returns equivalent to a stock and nor ill the potential losses by a steep. This is because a mutual fund is a portfolio of stock built after rigorous research done by expert fund managers.

A company's total capital is divided into shares. A stock in a firm means you own a piece of it, but a mutual fund collects money from multiple investors and invests it in a variety of assets, including stock in other companies. However, you should be aware that investing in mutual funds does not entitle you to become a part-owner of a corporation. Rather, you'll get mutual fund units in proportion to your investment. It is vital to understand the difference between mutual funds and equity stocks to make an informed investment decision.

The Lower The NAV Of A Scheme, The Better It Is
 

The Lower The NAV Of A Scheme, The Better It Is

What is NAV? NAV stands for Net-Assets Value. The market price of a mutual fund scheme, or the value of its assets less its liabilities per unit, is the NAV.

The NAV at which you can buy the mutual fund units is not important, rather it is what price the fund manager buys the underlying securities at that is important. You should never invest in mutual funds just because the NAV is low. The older the fund because the higher the NAV will be. Investors are unconcerned with a greater or lower NAV, according to financial advisors.

Assume you're investing in two schemes with identical portfolios. Because one scheme has been there for a while, its NAV is higher. The NAV of the other scheme, which is newer, is lower. This means that the investor would receive a greater quantity of items in a scheme with a lower NAV and fewer units in a scheme with a higher NAV. Both would, however, receive the same returns because the scheme's investments would appreciate or depreciate at the same rate because their portfolios are equal.

Guaranteed Returns 

Guaranteed Returns 

Returns on mutual funds are not guaranteed. The amount of money they get back will be determined by the performance of their assets. As a result, if you want assured returns, you should avoid mutual funds.

Even every mutual fund ad tells you that "mutual funds are subject to market risk," which indicates that the returns provided by mutual funds will fluctuate depending on market volatility.

Wrong Comparison

Wrong Comparison

Investors are only concerned with the amount of return a fund has provided, rather than whether the funds are in the same category or other elements of the funds. Comparisons should be made with the appropriate peers and benchmarks.

Apart from absolute returns, there are several things to consider when comparing mutual funds. Other factors to consider are the fund's consistency and resilience. You may have come across a number of mutual funds that offer a variety of benefits for a small commitment. However, at first glance, all of the funds in a given category appear to be the same. This makes it difficult to make an informed judgment.

For example, SBI Blue Chip Fund and SBI Small Cap Funds invest in distinct pools of equities, thus their performance cannot be compared. The SBI Bluechip Fund should be compared to other small-cap funds as well as its benchmark.

Looking Only At The Past Performance

Looking Only At The Past Performance

Mutual funds Investors should not base their investment strategies on a fund's historical success, as this can easily backfire. Many investors are deceived by a fund's historical performance, yet it has been found that many funds that have done well in the past have failed to deliver sufficient returns in the future. Funds that have a history of generating poor returns, on the other hand, have delivered good returns in the future in various cases.

There is no guarantee that the fund's previous performance will be repeated. Rather than relying solely on previous performance, investors should scrutinize every facet of funds.

Redeeming Early/Discontinuing SIP

Redeeming Early/Discontinuing SIP

The market's activity makes one nervous. And, when we're in a panic, we follow what everyone else is doing without understanding it, even though it wasn't required. Individuals who have been patient with their investments have always been rewarded by the market.

Don't get involved in asking the question that might harm your investment. Thinking about quitting the SIP and exiting the market world harms your investment and future goals. Rather than panicking with questions such as "should, I quit?", you should ask yourself, "Do I require money in the near future?" Markets fluctuate every time, no matter what, there's no need to tamper with your assets if your goal is long-term.

Story first published: Saturday, December 18, 2021, 11:13 [IST]
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