Learn about the common mistakes mutual fund investors make and how to avoid them.
1. Mistaking fund’s NAV for its price
Do not fall into the trap of confusing fund’s Net Asset Value (NAV) with its price. Many investors buy a fund with lower NAV thinking that they are getting a good deal. This is wrong. NAV is just a number (equal to assets / number of units) and should not be used when comparing two funds.
2. Investing in an NFO without doing research
Do not invest in a fancy heavily advertised mutual fund NFO that everyone is talking about. Such NFOs are usually launched by MF fund houses when the stock market is booming. They have catchy names that are popular at the time. For example, during 2007-08 bull run, many NFOs were launched with the focus on infrastructure and capital goods. After the crash, infra and capital goods sector fell out of favor and these funds lost a lot of money. Do not fall into NFO trap unless you understand what the fund is up to. Always invest in a time-tested mutual fund with long track record.
3. Selling when the market is down
When the markets are down, Mutual Funds do not perform well. This is expected and part of the risk associated with the investing in stocks and mutual funds. Do not sell a good fund just because it has not done well recently. Find out why it has not done well and also find out how the corresponding benchmark has performed. For example, if you invested in large cap fund which lost 20% in the last year, find out what the Sensex did in the same period. If Sensex also lost 20% or more, then your fund has not gone bad. Do not make the mistake of looking at the loss in isolation. Always compare the fund against its peers and the broader market.
4. Buying when the market is up
Do not start investing when everybody is talking about how good the market is. Many retail investors end up entering the market only when it has significantly moved up. Timing the market is very difficult and cannot be done by retail investors with limited knowledge. Investing in a SIP is the best way to avoid this trap.
5. Investing in multiple funds to diversify
Do not invest in multiple funds of the same category to reduce risk. Blindly investing in multiple funds without doing much research will give you a headache of managing multiple funds. The best way to reduce risk is to pick a fund with a good track-record and invest in it over time using SIP option.
6. Investing without doing research
Do not invest on borrowed knowledge. You will face many experts who will claim to know the best performing fund. Listen to all of them and then make up your own mind. Try to arrive at why they are recommending a fund.
7. Not selling bad funds till you recover your investment.
If you think your fund is not performing well, find out why.
Funds may under-perform for many reasons
(1) Fund manager may have changed
(2) Sectors that fund invested in is no longer favored in the market
(3) Fund has grown too big for its fund manager to manage
(4) Fund’s investment philosophy may be outdated.
Once you know a fund is bad, do not wait till you recover your investment. Sell it now and invest the money in a better fund.