Mistakes to Avoid While Investing in Mutual Funds

Investing in a mutual fund might be a lucrative option! How will you know if you have made the right decision? Read on find out more...

There are many instances where people simply invest for the sake of investing or to prevent the taxman from taking away their savings. This has been on the trend for quite some time now.

As a smart investor, it is advisable that you invest with a financial goal in mind. This holds true for mutual funds as well. Investing in a mutual fund may not require you to manage the mutual fund, but, this does not mean that you do not review your investment over time. Mutual funds are subject to market risks and so are the returns. If you do not care about your mutual fund investments, then you will not succeed in achieving any of your financial goals. While on the other hand, if you keep a regular check on your fund performance, you might just score more wealth than the average crowd.

In order to help you understand better, we have carefully curated a list of 7 common mistakes which you should avoid while investing in mutual funds. Read on to get a clear idea!

7 Common Mistakes you can’t afford to commit while investing in Mutual Funds!

Do not apply ‘cheaper the better’ formula- NAV or Net Asset Value

Mutual funds are purchased in specific units, NAV is the price per unit of a mutual fund. When you subscribe to a mutual fund, you are actually buying individual units as per the NAV. Many investors think that the NAV of a mutual fund influences the fund performance. This is completely incorrect as the NAV has no impact on the performance of a mutual fund. A higher/lower NAV does not determine a fund’s performance. A mutual fund having a NAV of ₹10 can deliver the same market-linked returns as a mutual fund with a NAV of ₹100.

Don’t Divert

Too early withdrawal is one of the common mistakes that early investors commit simply because the fund did not perform well for a few months. Market conditions are bound to be volatile, that’s how it functions. Nobody is immune from an economic fluctuation. It is advisable that you do not change your investment patterns based on every downfall. Wealth creation is a long term process, it requires one to be patient and considerate. Therefore, do not divert from your investment.

Do invest in Direct Mutual Funds only if you are well-versed with the market

Every mutual fund comes in two different variants, direct and growth. As a smart investor, it is advisable that you select a mutual fund with a direct option in comparison to a mutual fund with a growth option.

The difference lies in the total expense ratio. A direct mutual fund has 1% less expense ratio in comparison to a growth option mutual fund. A difference of 1% can have a significant impact on your maturity amount.

Long term investment can be 20% cheaper in a direct mutual fund for 20 years or more. For example, an investment of ₹10 lakhs in a regular growth mutual fund will compound to ₹96,46,293/- while the same investment in a direct mutual fund will compound to ₹1,15,23,087/-. The difference between the two compounded sum is ₹18,76,794/-. This is a big amount which cannot be overlooked over a period of 20 years.

Do consider Tax-Savings and Liability

The liability of income tax cannot be avoided with respect to a mutual fund. Mutual fund, being a financial and investment instrument, is bound to attract income tax which has to be borne by the investor.

Taxation on a mutual fund depends on two factors investment duration and the type of fund. The investment duration is defined as the tenure of investment which is classified into short term capital gains tax (STCG) and long term capital gains tax (LTGC). If you liquidate your mutual fund within three years, it will attract a flat STCG tax of 15%.

If you liquidate post 5 years, it will attract a LTCG tax of 10% over and above gains worth ₹1,00,00 for a single financial year. With respect to a debt mutual fund, if it is sold within one year, the gains from the fund will be a treat as income from another source and will be taxed as per your income tax slab. If a debt mutual fund is sold post 3 years, it will be taxed at a rate of 20% along with the indexation benefit.

Don’t forget to time the market

Many investors do not subscribe via a systematic investment plan. They try to time the market. Timing the market means that the investor buys a particular mutual fund during the time of a market dip, that is when the stock market is down and the NAV is available at a cheaper price.

Timing the market is not recommended for young investors. They may rather go with the traditional method of an SIP. Nobody can predict the stock market and there might be multiple cases of an economic downfall. Investment via SIP will help you take advantage of rupee cost averaging.

Do not invest all at once

As the title suggests, do not invest all your money into a mutual fund. At times, many investors get attracted to the financial markets and put all their money into mutual funds. This is a wrong decision as it will deplete your savings.

At any cost do not touch your emergency funds. You should invest in a mutual fund or any fund only when you have procured enough balance in your savings account. In case of an emergency or hospital admission, you will not be able to withdraw money from your mutual fund immediately. Also, it will take 3 working days for the amount to get credited into your bank account along with exit charges.

Do not forget to review

Mutual funds help you invest in various groups such as bonds, equity and gold. Every fund manager is good enough to make a profit for his investors followed by the mutual fund schemes policies. It is therefore required that you as in investor keep a regular track on the fund’s performance. A periodical review can definitely do well anytime. If you aren’t too sure about the fund’s performance you can certainly take a stand to weed them out!

Review – Investing in a mutual fund is just the first step of investment. Tracking your investment is the second step. When you review your fund on a regular basis, you are in a better position to make sound financial decisions with respect to the fund’s performance. A review per six months is ideal for any investor. This will help you keep your goals aligned with respect to your investment.

Recommended Read: How will I Make Right Mutual Funds Investment?