The number of investors putting their money in mutual funds is increasing year by year. While some seek professional advice, other investors opt for the Do It Yourself (DIY) investing model. The former kind of investment is based post the consideration of a lot of factors and parameters.
However, the DIY investing model is prone to glaring mistakes, one of which is the tendency to decide on mutual funds based on their past year returns.
The fact that many investors, especially the new-age ones look at trailing one-year returns only to decide their investments has caused many of them to choose funds not in sync with their risk profile and intended investment tenure.
Apart, many investors tend to jump into investments for fear of missing out on the possibility of earning good returns when the market is on a high. The assumption that they would be able to avail of the benefits in the short run will only lead them to suffer from unwarranted depression. The hurry to invest without realizing its implications in the long run is the biggest mutual fund mistake for many.
Take, for example, new fund offers (NFOs) that mutual fund houses advertise how and where they are going to invest their money. So, many investors rush in to invest their money. There is a sudden clamour to buy more units at the lowest Net Asset Value (NAV).
Ironically, no attention is paid to parameters like expense ratio, portfolio structure, exit load and fund management. The fund manager’s credibility based on his or her earlier performance is totally ignored. What is left is the glee of being able to invest. And, then reality dawns as the market hits a block.
This can be for any reason, be it changed government policies like the change in taxation rules for debt funds or the onset of an unforeseen epidemic or geopolitical factors like war, border tensions or scandalous events like the recent Hindenburg Research report on Adani.
Life comes to a full stop as stock prices come down hurtling to a new bottom every day. Investors feel cheated of their money with many even pulling out money at the first low for fear of losing their capital. They lose on two fronts – losses on their investments and added charges via exit load.
The pain is real for those who jump at the sight of any fund. Index funds do not turn anyone stinking rich overnight, yet many people jump at the idea of investing in these kinds of funds, all the while citing them as passive and free of active fund managers’ interference.
However, the same people would not mind putting their money in thematic funds suggesting how staying investing in a particular theme will help them reap the benefits of cyclical sector returns.
The biggest mutual fund mistake then translates to the worst mutual fund mistake. The sense of “trauma” is real, and so is the realization that not mutual funds make you rich. The learning that one must choose mutual funds with care and the knowledge of how staying invested in a mutual fund matters more than putting money in too many of them together.