Numerous mutual fund investors, particularly newcomers, are apprehensive as the market is correcting from its historical peak. After the steep correction in Mid and small cap (and now even large caps), Investors have started to discuss expensive valuations (6 months back), excess liquidity (due to demonetization) and general euphoria. As we are in the end of October 2018, a lot of investors are having doubt regarding the efficacy of Mutual Funds as an asset class. As we take ourselves back by a year (Oct 2017), mood was just the opposite, of euphoria and Optimism. The reality is somewhat different. Valuations and sentiment in October 2017 were a mistake similarly, Pessimist of October 2018 is stupidity. Are you investing in mutual funds? If yes! Then make sure to avoid these mistakes.
1- Investing in Balanced Funds Thinking as Regular Return Products
Most people think that investing in balanced funds is a regular return product that will provide a positive return always. But actually it’s a common mistake when investors think that balanced funds are regular return products. No income is assured in case of balanced funds. It can be volatile just like any other equity funds. Investing in balanced funds is just that there are chances you can earn higher returns over a longer period of time but it involves higher risks and you need to be patient.
2- Thinking of Dividend as an Extra Return on Your Fund
Some investors have the misconception that dividend is a return over & above your mutual fund schemes actual appreciation. According to experts that’s the biggest mistake in mutual fund investing. The dividend is your own capital coming back to you and can’t be assured. Balanced funds can’t guarantee you sustained returns through dividends.
3- Investing in Debt Funds without Realizing the Credit Risk, Duration Risk, & High Expense Ratios
Debt funds play an important role in an investor’s portfolio. You are suggested to take caution while investing in debt funds. Debit funds are good for investors but it is also important to understand the risk that comes along with them. Understand credit risk, how interest rates flow can impact your debt funds & expense ratios. Debit funds are also sensitive to high expense ratios.
4- Investing in Popular Sector Funds & Close Ended Theme Funds When They are Launched Based on a Market Fancy
Though sector funds have gone down over time but closed-end funds have continued. Recently it has also been declared by the Securities and Exchange Board of India that no such funds will be approved unless they are different from the existing funds even if you have open-ended funds as existing funds. It is a bad idea to invest in popular sector and closed-end theme funds based on a market fancy. It doesn’t make sense at all. You should invest on these funds only and only when they offer something unique.