3 mistakes mutual fund investors should not make

Vimal Joshi
Updated: 14 Dec 2021, 03:27 PM IST
TL;DR.

Mutual fund investment is considered to be a safe and lucrative that allows the money to grow consistently. For this to happen, investors must stick to the tried and tested rules, and minimise the occurrence of some common blunders that investors tend to make

Some mutual fund investors tend to keep the amount of SIPs constant.

Some mutual fund investors tend to keep the amount of SIPs constant.

Thanks to the advertising blitzkrieg and endorsement by top celebrities including Mahender Singh Dhoni and Sachin Tendulkar, mutual fund investments via SIPs have been growing perpetually for quite some time. In May 2021, mutual fund SIP (systematic investment plan) asset base touched an all-time high of 4.67 trillion and monthly SIP contribution reached an all-time high of over 9,900 crore in September 2021.

No wonder then, retail investors keep their hopes ultra-high after entering the financial markets through SIPs as if it were a surefire way to build wealth. Well, it could actually be the case so long as investors do not make any common blunder.

There are some mistakes which the mutual fund investors tend to make. The early investors must make sure to avoid them to maximise their gains over a period of time.

These are the common mistake which mutual fund investors often make:

 

1. Sticking to short-term approach

As per the latest AMFI data, only 55.6 percent of assets under management (AUMs) of retail investors were locked in equity funds for longer than two years. This points to one common trend among small investors. They invest in mutual funds over a period of time and whenever there is a need for funds — even for non-urgent reasons in the short term — they don’t refrain from selling some of the fund units.

Whereas the money managers assert that the savings and investment for long-term purposes such as buying a property, medical emergency or children’s overseas study should be used only for these. “There is no harm in unlocking the short-term investments when the need arises, but it is not advisable to sell the fund units that you invested in for a long period, say 10 years,” says Deepak Kumar Aggarwal, Delhi-based chartered accountant and financial advisor.

2. Keeping the SIPs constant

Although by the very nature of SIPs, investors are meant to deposit a fixed amount of investment every month. However, it is not advisable to keep the amount constant over a long period of time. As the income of investors increases, they should also increase the amount paid via SIPs.

Any investor who understands the power of compounding knows that a small increase in the contribution to a fund leads to a disproportionately higher increase in the return after a number of years.

For instance, when you increase the SIP by 5 percent, your overall return might increase by more than 20 percent. This happens because of the multiplier effect of compounding, which means the returns generated from the extra contribution are further ploughed into the fund, fetching you a higher return. This increased return is further re-invested for an even greater return, thus helping you increase your overall earning.

Increasing your contribution can help you compensate for less than expected returns because of a range of factors such as poor choice of fund, failure to evaluate the fund performance on a timely basis and lower alpha by some funds or because of bearishness in the market closer to goal.

It can be quite distressing when the market prices start to fall closer to the time when you are set to unlock your investments. In such a scenario, the extra contribution can make up for these unanticipated factors that can bring your total investments down.

3. The right time to sell the units

Although most financial advisors often suggest their clients not to wait for the “right” time to enter the stock markets since the SIPs average out the entry price points. However, it is noteworthy that the right time to sell the stockholding can be crucial, which may not always be the time when you actually need the money.

Exiting the fund in the same week you want to send your child abroad may not be a good idea because the sudden crash in the market can botch up your entire financial planning.

For instance, someone who wanted to exit the fund in March 2020 would have received far less than what he was hoping for until a month ago. It is because the Sensex and Nifty both fell by nearly 13 percent in just one day in March 2020 in the wake of nationwide lockdown announced after Pandemic.

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There are some common blunders which the mutual fund investors should avoid.

Upon meeting the financial goal and after pocketing the expected rate of return, the investors are advised to sell their fund units, and invest them in short term financial instruments to avoid facing a market crash.

To summarise, we can highlight that investors are advised to refrain from exiting the long-term fund for short-term expenses. They are supposed to increase their SIP contribution as their incomes move upward and importantly, not to wait till the last week or day to exit a fund, especially after their financial goals have been met.

 

First Published: 14 Dec 2021, 03:27 PM IST
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