Mutual Fund has become the most popular & secure way to create wealth and beat inflation by now. However, this should not give you a feeling that going into mutual fund will leave your money unlimited gains without any risk. Every year thousands of new investors with not even a basic knowledge and without any Market Research plunge into mutual funds with their hard earned money. When there is even a small fluctuation in the market, these novices have to suffer huge losses.
A mutual fund by itself is by no means a risky or a wrong product, it is the small little mistakes that investors make which actually sink their funds. The fresh investors in mutual funds are often guilty of mistaking it as some kind of lottery or a scheme which guarantees you fixed returns. It is because it is stock market based that it needs the maximum discipline, patience and a strategy in mutual funds. In next four pages we shall discuss the 5 most common and fatal mistakes which a beginner makes, so that you can identify these mistakes and safeguard your portfolio.
The most basic mistake made by beginners is to consider Past Performance(Old Returns) as everything. Whenever a new investor goes to any mutual fund app, he/she first filters the funds which have a highest return in 1 year or 3 year (like 40% or 50% return) and then invests his money blindly in it.
This may be quite a harmful approach. There is always a rule with mutual funds that “Past Performance does not guarantee Future Performance” and a fund or sector which has been a star performer during past year may or may not produce same performance during the next year. Sometimes during a rally in the stock market with some specialized sector like pharma or IT, the returns of your fund looks very high in the short term but subsequently they do face a lot of fall. So when you decide upon selecting a fund then do not look back on past 1 year return to decide but take into consideration the fund manager‘s track record, expense ratio, fund AUM and most importantly how did the fund perform during a market crash.
Dono agli badi galatiyan jo beginners ke returns ko silently kam karti hain:
Mistake 2: Wrong Hope of Creating Short-Term Wealth: Mutual fund, particularly Equity Funds, are not a “get rich quick scheme”. New investors come with dreams to double their money in 6 months / 1 year. It is not the magic of Equity mutual funds. it is the “Power of Compounding” in long term (5 to 10 years) period which works. In short term, stock market is always volatile (up & down). When the return expected in 6 months is not achieved or the account shows negative, the investors in a panic withdraw the money with loss.
Mistake 3: Picking Direct Plan instead of Regular Plan: Only minor new investors, at the advice of a bank agent, stockbroker or a typical disributor, would jump and go for ‘Regular Mutual Fund’ everytime. The commissions on Regular plans would be 1% to 1.5% per annum paid to your stockbroker year after year. On surface, giving 1% seems peanuts but on 20-25 years time frame it would capture 20-30% of your total returns. Always invest through any online app only in ‘Direct Plan’ wherein zero broker commission is paid.
Is a very serious issue which grooms the return on portfolios Over-Diversification.
In an attempt to reduce their risk, beginners would buy ten or twelve or fifteen different mutual fund schemes at the same time. They think that if I have more schemes then my portfolio will be safe and will generate more returns. But this is totally wrong perception. When you buy 10-12 funds, then technically you are putting little by little money in almost all the large companies of the market like Reliance or J. P. Morgan & HDFC banks, if you buy those funds. So overlapping of the same stocks start occurring among the different funds.
Over-diversification make it really difficult to manage your portfolio and instead of improving your returns, it is effectively equivalent to a typical savings account or Fixed deposit. Also you pay separate expense ratio on each fund. For a beginner, 2 to 3 well-researched Funds in the entire portfolio would be more than enough- for eg. a Large Cap/index fund, a Flexi Cap fund and if you have good risk appetite; a Small Cap fund.
The Most deadly and damaging mistake made by begginers is to sell in a panic out of fear in Market Down turn.
Whenever there is a 10-20% crash (due to geopolitical crisis, inflation or economy) in stock market, then the NAV (Net Asset Value of mutual fund) also starts coming down. The portfolio shows red color and shows a loss. At this stage the new investors get scared and by mistake can stop their monthly SIP or may sell all his mutual fund units at a loss and encash his money.
Is it Kyun Hai YEH SABSE BADI GALI?
Market crash is suppose to be a ‘Discount Sale’ for the investors in mutual funds. When the market falls, you get more units in the same amount of SIP (say Rs. 1000). When the market recovers, it is those extra units which give you the maximum profit. Selling in a panic makes your paper-loss to become a permanent-real-loss.
Master tip: Don‘t afraid of ups & downs in market. Be patient in the outlook, maintain long term perspective and disciplined way of SIP, learn the benefit of compounding without any panic!
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