Below are some common mutual fund mistakes that investors should probably avoid
As much as it goes to the investment into the mutual funds, it is usually characterized by some common misjudgments. The aim: To make more money than you currently have. But to reach it you can stumble for several steps, which will bring you back to zero. Now let’s take a look at some of the mistakes you should not make with mutual funds Number 1.
Failure to Conduct Studies Before Making an Investment
Among the most fatal mistakes, investors are taking with them is the lack of research while purchasing mutual funds. Using hearsay or going around asking friends about which fund to invest in is a very wrong thing to do. One should understand the main aim of the fund, inclusion of assets in the fund and good performance records of the fund. If you understand the choices available, the better position you are going to be in if you have to make the decision.
Other Factors That go Beyond The Expense Ratios
Sadly, expense ratios are not the only expense that investors are charged when they invest in a mutual fund. Some of the funds may have entry or exit loads which are the charges you incur when you are buying or redeeming the units. These are actual costs that can be easily overlooked, but which will still have a direct impact on your bottom-line. In addition, glance at the additional costs which are often hidden in the small print.
Ignoring Risk Tolerance
Your mutual fund portfolio depends on your level of risk taking as an investor. What does that mean? In other words, you should go for funds of your choice depending on the risk taken into consideration. Each individual has a tolerance level to risk —while some would be comfortable with high risk investment portfolios, others will opt for low risk investment portfolios.
Perusing High Returns in Investment Decisions Without Contemplating Risk
Of course we do, who doesn’t want the highest returns possible? But now, pay attention to this – There are high risks that coincide with these high levels of returns. The problem is that running after the best performing fund blindly without knowing what could happen if the market turns bad may lead to a huge loss. When investing in your funds, always ensure that you have had a balance between risk and return.
Balancing Risk and Returns:
There is always the danger of taking too much risk because the rewards are high. Spread your investment across different risk grades —the funds may be equity funds, debt funds or hybrid funds. To avoid the kind of situation where you are so invested in one type of stock that a downturn in that sector is devastating to your portfolio, you should have a diversified one.
Poor Diversification:
Investing is fundamentally based on the process of diversification but even that remains a concept some investors get wrong. Focusing on one particular sector or investing in only one type of fund can put you in a bad spot when the specific sector or fund type is hit hardest by the dynamics of the market and, on the other hand, diversifying your investment can water down your earnings. Now let us look at each of these two extremes.
Over-concentrating in a Single Sector:
In other words, if your portfolio is too specialized, you are taking all your risks in a single area of investment. When that sector does poorly, your entire investment suffers a loss. When you are creating your portfolio, try and diversify so that it does not hang on the performance of one sector.
Over-diversifying:
On the other hand, holding too many funds can dilute your investments in that you will end up investing little in each fund. The concern here is often that one gets too spread out; he or she has so many funds that one cannot follow their progress rigorously. It is wiser to have a decent portfolio that one can handle enough without straining so much on it.
Trying to Time the Market:
Market timing is the procedure of buying shares at a lowest point and then selling them at the highest achievable point. Sounds perfect, right? Sadly, even experienced investors do not seem to get it right all the time. To tell the truth, surmising short term market fluctuations would almost be impractical and market timing would end up being detrimental .
Emotional Investing:
Feelings and stock trading do not go hand in hand. A high percentage of investors will make the mistake of purchasing stocks when the prices are at an upward trend (due to excitement) and selling stocks when prices are down (due to fear). This emotional cycle is actually detrimental to your long term results. However, one should remain as close to the basics as possible and does not deviate from the prescribed strategy.
Why It May Be Important to Remain Invested During the Bumpy Ride
The ups and downs of the market are inevitable when investing. Finally, what most investors fail to understand is that it is totally normal for the market to go down. Well, do not pull out your money and rather target the long-term goals you have set as an investor. That has always proven to be the case and those who exercise patience turned out to have better improved markets.
The true value of compounding has once again been overlooked.
Compound interests are your allies throughout the investment world. And the beauty of it is that when your investments earn returns, those returns also begin to yield returns. The longer term of investment holding, the deeper you will be benefiting from compounding. Failure to do this can result in leaving a lot of potential wealth untapped on the ground.
Exiting Early
Delaying your exit can also be disadvantageous. Looking at the examples we have used, earning profits from your investments is not the only thing, exiting your investments early is also costly. Most people feel uncomfortable with any form of loss hence before problems occur in the economy they will sell other securities in the market. But mutual funds are created as a product for long-term investments for wealth creation. It can be learned that going to the game too early and leaving the same too early can be counterproductive.
Exiting During Market Downturn
Pulling your money at the wrong time out of the market is a common error of trading because it cancels the loss. Markets have a way of coming back, meaning that selling at low price means you will surely incur those losses. Exit at IPO: This means panicking is very unhealthy to do so.
This brings us the final lesson – how to stay committed to a long-term plan.
Only when you follow a carefully thought out investment plan should the light shine. Sustain it when the market eventually appears unreliable. The long-term investors are those who are energized and stay persistent thus stand to benefit from such exits.
Ignoring Tax Implications
Especially for the mutual fund investor, taxes become a real threat to erode the returns on the mutual fund. As you are going to learn, the treatment of different funds also varies from one tax regime to the other. Get professional advice from your tax consultant to minimize tax liability within mutual funds related investments.
FAQs
1.The first thing any investor should consider before investing in a mutual fund is?
Research is key. Before making any decisions the following information needs to be considered: the objective of the fund, its asset distribution, as well as expenses.
2. Often, managers are inclined to believe that a company’s past performance determines the outcome of its future performance.
No, in fact past performance does not guarantee future returns, as people always say. That is why we must take into account such factors as the risk and expense ratios.
3. What can be done to minimize such an investment?
It should be a practice that will court the long-term and not make decisions simply based on what is happening in the short-term markets.
4. Here’s why one should continue holding their investments during volatile periods of the market.
Markets have always come out of the downturn. Staying invested does not allow you to get fixated on loss therefore avoiding locking on losses.
5. It will pay to know how tax affects your mutual fund investments.
Taxes may affect your returns and that is why
