Mutual Funds have taken its limelight over the past few years as a way of building and growing wealth. Over time, investors keep investing in various mutual fund schemes partly based on their own study and partly because of their peer or advisor suggestions. This shows that the beginning of online investment platforms eased mutual fund investing for the novice. This ease motivates many of the first-time investors to take a do-it-yourself method instead of depending on financial advisors for professional advice.
However, the lack of understanding about mutual funds and capital markets leads people to make mistakes in their investment decisions. The mistakes occur commonly but the knowledge of it is hardly shared leading to the repetition of the same mistakes. These mistakes may affect the most important part of the investment – the returns.
Hence, below are some common mistakes that mutual fund investors should avoid, so that they can start earning the returns they deserve.
- Disregarding the Expense Ratio
Like any other service, mutual funds come at cost because you will have your investments managed by professionals. If you are disregarding the expense ratio of a fund which is on the higher side, you are decreasing your returns. The high expense ratio of Equity Mutual Funds is 2.5% and Debt Fund is 2.25%. Low expense ratio is an indication of efficiency and good fund and higher expense ratio signals a more expensive fund.
- Underrating Volatility
Volatility is beneficial when the markets are rising, at the same time, it is fatal when the markets are falling. It is an aspect that has the ability to make an impact to your investments profoundly and that it should not be underrated. You might underrate volatility thinking that you can time the markets and gain back the funds when the markets are about to fall. This is a very deadly task and you might end up losing your money. So how are you going to measure volatility?
Volatility can be measured by Standard Deviation. Standard Deviation of fund measures the extent of volatility. This gives you an idea about the performance of funds in both bull and bear markets. Volatile funds may affect your investments, if you plan a short-term investment. However, the effect caused by volatility is condensed in a long time horizon and minor fluctuations do not make a difference. So, it is always recommended to go for funds which are stable in nature rather than volatile ones because it helps to make the most of the market state.
- Disregarding Debt Funds
Investors tend to overlook debt funds because they believe the returns are not as high as equity funds. However, debt funds are a very diverse category. There are different kinds of debt funds which could be used for various investment purposes. As an investor, you have to discover the diverse category of debt fund and allot your investment in both the classes for the best outcome. If you make commit the mistake of disregarding debt funds and focus only on equities, you may be uncovering your investment to a greater harm and missing out returns that non-equity components of investments offer.
Mutual fund investing mistakes can simultaneously affect your investment life. Now that you know some of them, it is time to let go of them and make only the investment practices that will help you gain the maximum profit.