Mutual fund investments have become as easy as pie for many investors today, or at least they like to think so. However, there is a fine line between confidence and overconfidence. What shall one do to not spoil their chances of a higher investment return and smooth compounding?
Read further to know six common mistakes to avoid if you want to be what Benjamin Graham said, and we quote, “An intelligent investor”.
1. Insufficient research
The phrase, “Half knowledge is dangerous”, applies well in mutual fund investments. You shouldn’t just invest by looking at the top base metrics like NAV and Expense ratio. To understand your investments better, dig deeper and analyse factors like AUM(Asset Under Management), Sortino Ratio, Rolling return, and the fund manager’s experience.
2. Short-term investments
Locking in your money for a short period doesn’t make much sense. It doesn’t compound well; besides, the LTCG costs you a fortune! Mutual funds can be a bigger bang for your buck if invested for years and even decades; the more, the merrier.
3. Investing in too many funds
You ruin your investment game when you invest in an unmanageable number of funds. You can’t help but get overwhelmed. Amidst trying to manage your massive investments altogether, you end up managing none.
4. Over and under diversification
An over-diversified portfolio lacks the ability to focus on quality. On the other hand, putting all your eggs in one basket is highly risky. Diversify in moderation and wait for the fruits of return. You can diversify within various industries or even countries if you wish to go global with your investments.
5. Going all-in
The experts do not recommend putting all your savings in mutual funds. One should have an emergency fund aside before investing in the financial markets. Ideally, an emergency fund should have at least 6 months’ worth of your expenses. Doing so gives you an edge of protection in times of volatility. This also means you don’t have to cash out your investment to provide for an emergency.
6. Not tracking your fund
Don’t leave your investment high and dry after automating your monthly SIP and forgetting about your money. Track the market conditions and keep rebalancing your investments by shifting a higher percentage to the debt and gold market during market crashes.
Know the market and your appetite
If done strategically, mutual funds are a great investment option. One should know the market before putting their hard-earned money into it. Investing is a very personal activity. Hence, going with the herd and duplicating a stock market celebrity’s portfolio will be impractical for you. Understanding your risk appetite and time horizon is a non-negotiable investing wisdom everyone should have.