An old friend of mine recently discovered mutual funds.
After spending weeks researching about various funds, he is eager to invest around ₹1 crore for a long-term.
However, I’m trying to stop him from doing so.
But why am I doing this?
If you are a seasoned investor, you’ve probably been hearing that mutual funds are the best investment instrument, if you want long-term capital appreciation.
Well, the reason is simple. My friend is trying to invest in funds with unrealistic expectations.
He wants to make changes to his financial portfolio, based on past projections.
In this article
- Why do investors invest based on past returns?
- The mistakes you should avoid while investing in mutual funds
- How should you be investing in mutual funds?
- 4 mantras to keep in mind while investing in mutual funds
Why do investors invest based on past returns?
In the last 5 years, the Indian mutual fund industry has seen a tremendous increase in the number of investors and a lot of these investors invest based on past returns.
Lured by greed, many investors end up making a mistake, while investing in mutual funds.
For example, a high performing small-cap fund would have given returns of around 40% in 2014, but gave a return of only 20% in 2017.
In December 2016, the asset under management (AUM) of the mutual fund industry grew by 30%.
From ₹16.46 lakh crores in December 2016, to a record ₹21.37 lakh crores in December 2017.
Investors are putting in more than ₹6,200 crore a month into equity mutual funds via systematic investment plans (SIPs), compared to ₹1,950 crore in April 2014.
The mistakes you should avoid while investing in mutual funds
1. Don’t be tempted to invest in balanced funds for the regular dividend pay-out they have been offering,
2. Don’t just consider investing in mid and small-cap mutual funds, because they give high returns,
3 Don’t start a fresh SIP in an equity fund, hoping to recapture the high returns an existing SIP has fetched in recent years.
4. Don’t abruptly shift your investments to high return equity funds because of relatively low returns from your debt funds.
How should you be investing in mutual funds?
Attempting to move in and out of the market, as per market conditions, can be costly. We all knoew that.
A research study done by Morningstar shows that the decision an investor makes about when to buy and sell a fund, causes that investor to perform better or worse.
Therefore, never try to time the market.
Instead, you should invest regularly. The longer you invest for, the better.
This way, short-term downturns will not have much of an impact on your ultimate performance.
4 mantras to keep in mind while investing in mutual funds
1. Remain invested
Market downturns may be upsetting, but history shows that the Indian stock market has been able to recover from declines and has proven to provide investors with positive long-term returns.
Hence, don’t panic when the market is performing poorly. Remain invested.
Uncertainty is constant, and downturns can happen frequently. But market setbacks have typically been followed by recoveries.
2. Stay disciplined
Market volatility can occur in different ways. It could be a change in policies, geopolitical unrest, or an economic downfall.
Market swings can often rattle even seasoned investors. Also, trying to time the market could cost you dearly.
Systematic Investment Plan (SIP) is an instrument which helps you avoid the risk of timing the market and facilitates wealth creation in a disciplined manner, by averaging the cost of investments.
3. Plan for a variety of mutual funds
There are different types of mutual funds available to match an investors goals.
Contrary to popular belief, all mutual funds do not invest in stocks.
There are debt mutual funds which invest in debt instruments, or fixed income securities.
These schemes are not affected by volatility in the stock market.
Debt mutual funds are considered ideal if you want to meet short-term financial goals, as they are less volatile and offer marginally higher returns than bank deposits.
Hence, diversify your portfolio by keeping your risk appetite and investment duration in mind.
4. Consider help
The number of mutual fund investors has grown vastly in the last few years.However, many of them are clueless on which fund they should invest in.
So, you may want to look at a professionally managed solution.
A line that every mutual fund investor hears or reads is, “Mutual fund investment is subject to market risk, please read the offer document carefully before investing’
Let me tell you, this really is true.
There are a lot of factors you should take into consideration before selecting a mutual fund scheme that matches your investment goal.
An understanding of market risk is important, but if you have chosen the asset class that best meets your investment objectives, you can trust the fund manager to manage the market risk for you.
As an investor, you should focus on things you can control, which are:
1.Choosing a fund that syncs with your financial goals
2.Following the apt investment procedure
3. Reviewing your investments every year.
Mutual fund investors in India may disagree on strategies and fund choices.
But one of the few things that most would agree on is that investing for the long-term is an ideal method to maximize potential gains and reduce risk.
Disclaimer : The views expressed in this post are that of the author and not those of Groww