5 Common mutual fund investment mistakes to avoid
The mutual fund industry in India handles assets worth trillions. Though this might seem huge, compared to other developed markets, the industry is still an emerging market. This would become especially clear when you compare the market to the US mutual fund industry. However, India’s mutual fund services and the industry itself is growing fast. There is an increasing number of retail investors from smaller cities in India. However, if you are starting new, there are a few mistakes you would like to avoid. Let us take a look at them.
- An excessive focus on expense ratio – A lot of novice investors do cursory research online and find experts talking about the virtues of low expense ratios. The focus on low expense ratios would work well in developed markets as in the US. However, it does not hold true in India. In the developed markets, historical data shows the better performing funds were not. But India has a growing economic landscape and the capital markets have huge growth potential. Thus the actively managed funds perform much better than the index funds and exchange traded funds.
- NFO investments – We have been witnessing many newer fund schemes and offers in India since last few years. Many new investors think that they can buy units at low prices. Though the strategy works well in case of IPO (or Initial Public Offering), it is not effective in case of NFO as there are no existing investments that determine the units to be expensive or cheap. Also, there is no prior performance data to determine the investment style. Also, the NFO investors do not receive special discounts either from mutual fund services. Thus, an NFO investment is just a high-risk equity investment.
- Thematic Scheme Investments – Some investors feel that the sectors which have shown negative growth are potential opportunities for growth and these should invest at cheap rates. Though this seems like a good plan, it might not work without a good understanding of that particular sector. A lot of thematic funds operate on business cycles and many are launched when a sector performs well. If the cycle reverses, the sector might take a long time to offer good returns.
- Redeeming at slightest correction – This is one of the most common mistakes of a novice investing in mutual funds. A lot of new investors enter the capital markets when they are at record heights and redeem the investments during their correction. They often do so at a loss. These investments can never be successful unless made over the long term. The new investors should stay invested to reap compounding benefits.
- Opting for the dividend option – Often stock market investors want to redeem their shares after the company distributes a reward. Distribution of dividends is a proof of strong and profitable financial condition of the company. This drives share prices. Mutual funds have units that are not the same. The mutual fund dividends are funded through theAssets Under Management and this decreases the NAV. In other words, they work best if you stay invested.
The aforementioned are some of the most common mistakes made by investors while investing in mutual funds. You would want to steer clear of them while you invest.