Over the last few years mutual funds have become a preferred and trustworthy investment vehicle, both for new and seasoned investors. There are many schemes available in the industry, based on asset classes such as equity, hybrid, debt, among others, and based on various themes and sectors. We can safely conclude, there is a mutual fund solution available for every type of investor suited to their needs, risk appetite and investment timeframe. Having said that there have been a few myths and wrong advice afloat on the internet about investing in mutual fund schemes. Let us debunk some of them.
- Timing the market
Never try and time the market because there is no opportune time to enter the market. Wealth is not created by identifying the most appropriate time to start investing in the market, instead wealth is created by spending time invested in the market. Your decision to start investments should be made based on your risk appetite, investment horizon and financial goals. So, start investing as soon as possible.
- Investing without identifying one’s investment horizon, financial goals and risk appetite
Often people start investing without outlining the primary goal for which they are investing. While investing is a good habit, investing without a goal is like throwing a dart blindfolded. A few may land on the board but chances of hitting the bullseye are very low to none. Similarly, investing without a defined financial goal can help grow your money but that corpus may not be sufficient to meet any future financial requirements. So before you start an investment, you must first identify your financial goal. Financial goals are personal objectives you strive to achieve, such as saving for retirement. Then decide your investment horizon which is the period over which you want to remain invested in a scheme and can be classified as short-term, medium-term, or long-term. Last but not the least, understand your risk appetite as this dictates the amount of risk you are willing to take.
- Copying someone else’s portfolio
Acting on tips from a co-worker, friend or a relative may work for your personal life but not for investments. Selecting mutual funds to invest in because they worked for someone you know is not the right thing to do. Everyone is at a different stage of investing and is saving and investing for their personal financial goals based on their own risk appetite and investment horizon. There is no one-size-fits-all approach to investing. Always do your own research before investing or opt for a financial advisor who can help you plan investments according to your financial situation and requirements.
- Choosing schemes based on the scheme’s past performance
Often investors tend to take their investment decisions based on past performance of a scheme. While one can take a look at the scheme’s historical performance before investing, but that shouldn’t be the only criteria while choosing a scheme. As we all are aware past performance doesn’t guarantee future returns. After identifying your financial goals as long-term, medium-term or short-term, you should look for funds where the category, investment strategy investment objective of the scheme, among others are most aligned with your financial goal. Then you can look at the consistency of the scheme in delivering returns and its legacy (if there is one). If you are still confused after this, then do not hesitate or delay in reaching out to a financial advisor or expert.
- The more the number of funds you invest in, the higher the returns will be
It is essential to diversify your portfolio but overdiversifying and investing in too many funds will do more harm than good. As they say – too many feathers ruffle the hat. Investing in too many schemes could lower the return potential. We suggest you invest in a maximum of 6 schemes in your portfolio based on varied goals you have. While this is not an absolute number and can change based on your financial requirements, it is important that your portfolio is not overcrowded with schemes as that could lead to multiple schemes with similar mandates and investment strategies. Also, too many schemes will make it hard for you to monitor performance and asset allocation.