5 Mistakes to Avoid When Investing in Mutual Funds This Diwali
As the Diwali season approaches, advertisements and financial recommendations encourage people to spend and invest. Many are advised to consider gold or specific stocks during the festival season, but historical data shows no particular benefit from investing at this time over any other. Whether you invest in stocks, mutual funds, or gold, you should always plan according to your own goals rather than market timing.
For those receiving bonus or incentive money during Diwali, this is the perfect time to invest some of it and also save some for festive season buying. However, most mutual fund investors, especially the first-timers, commit basic mistakes. Here are five mistakes to avoid:
Waiting for the Perfect Moment to Invest
Probably, the most common mistake is trying to time the market. Markets are inherently unpredictable. Therefore, waiting for the “perfect” time to invest usually leads to missing the best opportunity. Instead, experts advise focusing on individual financial goals and starting as soon as possible. This way, maximum compounding is allowed, which helps greatly with long-term investments.
Chasing Returns Without a Strategy
The temptation to chase high-performing funds is huge, but investing without knowing what you want to achieve serves no purpose. Like embarking on a trip without knowing the direction you would like to take or where you would like to end up, it is more important to define clear financial goals and then identify funds that advance those objectives. That way, your investments are not reactive because of short-term trends but purposeful.
Reacting to Market Volatility by Withdrawing
Market dips can cause anxiety, leading some investors to withdraw their investments prematurely. For example, the Nifty50 recently saw a drop of around 8% from its peak, which may have triggered concerns. Experienced investors, however, often view such market declines as buying opportunities, allowing them to enhance their portfolios for long-term gains. Maintaining patience and riding through volatility can help avoid unnecessary losses and support long-term wealth creation.
Focusing Solely on One Asset Class
Investment into a single asset class without diversifying is another very common mistake. Take the example of gold, which, after spiking recently to around Rs.80,000, has tempted a few investors to invest completely in the yellow metal. However, a concentrated investment portfolio makes it risky. Experts advocate diversification across various asset classes- stocks, bonds, and gold among others- which helps manage risk and improves the scope of return on investment. A well-diversified portfolio is generally more resilient to market fluctuations.
Overemphasis on Past Performance
It is easy to get attracted to funds that have performed well in the past. However, high past performance does not necessarily translate to good future performance. Since market conditions are always changing, relying solely on past performance as a selection criterion is a recipe for disappointment. A more balanced assessment also takes into account the strategy, consistency, and how the fund aligns with one’s long-term financial objectives.
Experts first contend that investors define their objectives, risk tolerance, and investment horizon. Subsequently, they need to assess mutual funds relative to other parameters like how they stand against their peers, the asset management company’s track record, the size of the fund, and the experience of the fund manager. This disciplined, structured approach guides investors to make well-informed decisions in light of their financial needs.
A Disciplined Approach to Financial Success
Avoiding these mistakes and having a well-thought-out investment strategy will help in building confidence towards achieving any financial goals. This Diwali, and beyond, will actually be happy to discover ways to maximise investments in mutual funds with greater peace of mind about all the uncertainties of the market.
