Every investor is taught what he should be looking into while making an investment, but very often they are unaware of the mistakes that they make while opting for a mutual fund. This article, would discuss about the very common or costly mistakes that the investor makes which should be avoided.
1. Overlooking or ignoring the risks involved: Investors know the benefits of opting a mutual fund before choosing it but they generally ignore the risks associated with it. No investment is risk free, every investment comes along with a risk. One must identify and introspect the entire risk that ispresent and its profiling should be done before selecting a perfect mutual fund.
2. Infuse money in many Mutual Funds: Investing in 15, 20 mutual funds is absurdity. You should always be able to manage your portfolio well with diversified investments by having a range of just 5 or 6 mutual funds. One should opt for a very small number of funds by checking whether they are in conformance with their risk tolerance and time horizon.
3. Not selecting a fund that is in conformance with your pattern of investment: MF’s are generally of two types – actively managed and passively managed. If you are more of a committed investor, then opting for actively managed funds would give you a better scope, as its high commission cost and fees would leave you a bit unaffected. If you’re more of slow-and- steady income person, then go for passively managed funds such as index funds.
4. Trailing the past performance: Past performance of a particular fund cannot be used to predict the future of the similar fund. Past performance should not be the sole reason to select a mutual fund, other attributes and benefits should be taken into consideration too. This should be avoided as it also reduces the chances of selection of a non performing fund.
5. Preference only for close ended funds: Investors should start preferring for open ended funds too as they offer much liquidity and also they can purchase them at the NAV. Open ended funds also enable to issue and return the units anytime during the entire term.
6. Overpaying: This is another issue that all investors face while buying a MF. They end up paying more than required due to high expense ratios, commission costs and these expenses will eat up the expected returns and cost them some serious coin. One should compare and check for better deals to save costs.
7. Not reading the MF prospectus: Before buying an MF, you should read the legal document provided which lists out the investment strategy, your professional will use to invest the money in the mutual fund. Committing these simple and common mistakes will definitely put in you in a bad situation and you might have to face serious consequences. Try avoiding these to have a safe and happy future!