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Mutual fund investing has become extremely popular in India over the last 6-8 years, thanks to the growing trend of financialisation of domestic household savings. The AUM (Assets Under Management) of the Indian mutual fund industry has jumped 6 times in the last 10 years—from Rs 7.5 lac crore in 2013 to Rs 46.6 lac crore in September 2023.       

Are you new to mutual fund investing and searching for mutual fund investment guide? 

Look nowhere else. In this article, we are going to highlight the reasons why you should consider investing in mutual funds and mistakes to avoid while investing in mutual funds. 

Mutual fund investing made  simple

Mutual Funds can help you secure your financial future and wellbeing. Additionally, since they help you  invest in a range of asset classes by providing professional assistance, they may play a crucial role in your investment portfolio. You can start investing in most mutual funds with just Rs 500,& since they are a SEBI regulated product, their business is completely transparent. 

However, decisions especially when concerning your financial health can be risky if they are impulsive or  thoughtless. So, keep these points in mind when investing in Mutual Funds:

  1. Following finfluencers blindly 

Digital adaptation among investors has improved substantially post the pandemic. As a result, the social media space is abuzz with finfluencers (financial influencers). While some of them might be genuinely educating investors,  others may lack the sincerity to advise investors over finances. 

Many of them may not even be qualified to speak about money matters or may have a vested interest. Take cognizance of potential threats emanating from wrong and/or biased advice. 

If  If still confused, it is strongly encouraged that you to consult a qualified financial advisor before investing. For product-related queries, you may talk to mutual fund houses directly or touch base with their official channel partners or distributors. 

  1. Having unrealistic expectations from mutual fund investments 

This is particularly true in the case of equity-oriented mutual funds. For instance, unabated rallies attract new investors to stock markets. Novice investors often flock to mutual funds in search of high returns and assume that the good performance of recent years would continue without any aberration. This is an unrealistic expectation that may cause disappointment in the end. 

Historically, Indian markets have generated compounded annualised returns (CAGR) of 12%-15%.  However, markets go through cycles. During bull runs, markets may generate above-average returns. The performance of mutual funds might remain subdued in bear market phases. Therefore, investors should invest in equity funds only with a long term view.  

  1. Investing in mutual funds without any planning 

Since mutual funds help you invest in a range of asset classes, from equity to debt to gold, etc, you must appraise your risk appetite. For example, equity mutual funds can help you generate superior inflation-adjusted returns, but they expose you to high risk. Unless your risk appetite is high and you can stay invested for the long term, equity funds may not suit you, no matter how bright their potential might be. 

Here’s a simple planning process to follow before investing in mutual funds: 

  1. Identify your goals 
  2. Fix a time horizon
  3. Assess your risk appetite
  4. Chalk out asset allocation 
  5. Start investing in mutual funds accordingly 

  1. Avoiding an SIP if you don’t earn a fixed sum every month

Many investors shy away from investing in SIPs (Systematic Investment Plan) if they have a non-salary income source, typically business income. True, SIP is a monthly commitment, but so is the home loan EMI. So even if you do not have a consistent inflow of funds, try allocting some amount to ensure regular investment for the long run without putting much additional burden on your wallet. 

  1. Investing in too many schemes 

You must adequately diversify across scheme types and fund houses, but over-diversification doesn’t serve any purpose either. Investors keep adding the top-performing schemes and star-rated funds to their portfolio as and when they learn about them.No magic formula tells you how many schemes you should ideally invest in. Nonetheless, you can broadly decide how many mutual fund categories suit your needs, time horizon and risk appetite and choose a scheme from each of those categories.  

  1. Abandoning SIPs under challenging market conditions 

SIPs work on the principle of rupee-cost averaging. When markets are in an uptrend, you accumulate a smaller number of units and pile up more during downtrends. If you discontinue SIPs under distressed market conditions, you may end up wasting a chance to increase your unit count. In fact, falling markets are the perfect time to top up your SIP.  

  1. Investing in debt funds thinking that they are alternatives to Fixed Deposits (FDs)

Debt funds don’t pay you any interest because your investments in debt funds are not in the form of deposits. You make capital investments, and your returns are subject to market risks. Nobody can guarantee your returns or even the safety of your principal. 

Moreover, it’s true that debt funds expose you to lower risk as compared to equity funds, but they aren’t completely risk -free. Debt funds are subject to default risk and interest rate risk, to name a few. 

  1. Avoiding funds with higher NAVs (Net Asset Values)

The lower the NAV, cheaper and better it is—this is the biggest mutual fund myth of all time. A scheme with an NAV of Rs 15 isn’t cheap as compared to a scheme with an NAV of Rs 150. Although, the latter option will offer you lesser units as compared to the former, by no means does it suggest that a scheme with a Rs 15 NAV will clock higher returns in future. 

The starting point of a scheme and scheme option—growth or dividend (IDCW)—decides how high or low the NAV is. A scheme launched in 2001 when the Nifty 50 was around 1000 points, will have a much higher NAV vis-a-vis a scheme launched in October 2023 when the index was just shy of 21,000 mark. The starting point matters! 

  1. Not keeping track of your mutual fund portfolio

Mutual fund investing is an ongoing process and it doesn’t end with you selecting the best schemes for your portfolio. It’s important to review your mutual fund investments once in a while, just to check if they are performing in line with their peers and if they still have a role to play in your overall financial planning. Ideally, you should review your portfolio once or twice a year. 

In closing

While you scan the available data across the internet, friends & family for the best mutual fund investment guide it is also prudent to focus on the mistakes to avoid while investing in mutual funds to make the most of your wealth.

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