We do a lots of mistakes while investing in any financial instruments. But two mistakes every Investors does in Mutual Funds:
1. Investors take MFs as a trading instrument.
2. Investors look into MFs recent returns.
Well, after evaluating these two mistakes. I have come to my opinion with different do’s and don’ts.
Do’s
1. Portfolio Mix:
Investors must look into different funds to diversify their portfolio. For e.g: a basket of equity and debt funds are important rather than just focusing on mainstream schemes like small caps, large caps, multi caps etc. Diversification can reduce risk not only through stocks but also we can reduce risk with mix of stocks and bonds as well.
2. Cost of investing:
Mutual funds are just not about equity it’s also about debt . And when we say debt, it means returns are less than equity. Every investor must check the cost of debt funds before past returns. Avoid chasing higher yields and keep focusing on the credit quality in debt funds.
3. Goal based investing:
Investing without goal is like walking without knowing any destination. For near term, Investors can select debt funds and for long term, Investors can select equity funds. Timing the investment with proper goal in mind is very important for investing in mutual funds.
4. Lumpsum during market correction:
Whenever market corrects for about 30% then it’s better to invest some lumpsum amount believing market will recover again in the long term. Indian equity market is having a good long term growth story for next 5 to 10 years.
Don’ts
1. Bias towards recent returns:
Investors make a judgement through recent month performance. We can analyse the past returns for at least 5 years and keep looking into funds how they have performed over that period. So, it’s better not to make any call seeing returns over past few months.
2. Remain invested during market correction:
Investors panic a lot during corrections. Getting out of funds is not a solution. If you have regular cash flows then it’s better to stay put in the funds and give your investment some time to grow.
3. Setting unrealistic returns:
Equity investment is all about volatility. Sometimes due to volatility we can’t get the returns which are expected.So, expecting higher returns every possible year is not necessary. But same thing gets repeated here again stay put rather than exiting because market volatility plays an important role in generating returns out of mutual funds and on the same time debt funds also play crucial role as it will create balance.
So,these are all my assessments regarding mutual funds and during this tough time I’ve thought of sharing my views on this which can help others. Stay healthy and stay invested.
Financial Economics 