5 MISTAKES TO AVOID IF YOU WANT HIGHER MUTUAL FUND RETURNS

Investing in mutual funds is considered a suitable method for accomplishing long-term financial objectives and cultivating wealth efficiently while minimising tax implications. These funds not only offer the potential for returns that surpass inflation but also provide a way to manage risk. The core elements for maximising the benefits of mutual funds are maintaining patience and staying focused on predetermined goals.

Nevertheless, many investors often encounter unfavourable experiences with mutual fund investments. More often than not, these negative outcomes are not due to the poor performance of the funds but rather the result of investors’ irrational behaviours.

Here are five common mutual fund mistakes which you should avoid if you want higher returns from mutual funds:

Short-Term Focus and Goal Ambiguity

Avoid investing in mutual funds for short-term gains. It’s essential to have a long-term investment horizon of at least seven years, preferably longer. Market performance, influenced by the underlying securities of mutual fund schemes, follows cycles of outperformance and underperformance. Short-term investments might not yield desired outcomes unless accompanied by exceptional luck. Additionally, investing without specific goals can lead to undisciplined and volatile decision-making during market fluctuations. Having clear goals helps in enduring market cycles, enabling the acquisition of units at lower prices, and eventually fostering substantial long-term wealth.

Also Read: The hidden powers of your bank account you may not be aware of

Inadequate Investment

Ensuring the proportional alignment of your mutual fund investments with your future financial objectives is crucial. For instance, if you aim to accumulate a corpus of Rs 1 crore in the next 20 years, investing Rs 1000 monthly or a lump sum of Rs 1 lakh might seem feasible. However, without considering the required investment for such a goal, the actual returns might fall short of the target. A precise monthly investment of Rs 7,550 or a lump sum of Rs 6.1 lakh is essential to reach the stipulated financial goal. Therefore, it’s crucial to evaluate and invest the required amount to meet the desired financial milestones.

Discontinuing SIPs and Frequent Withdrawals

Stopping Systematic Investment Plans (SIPs) disrupts the consistency of disciplined investments and hampers the accumulation of units. SIPs aid in averaging investment costs, crucial for compounding growth. Instead of abruptly ceasing SIPs, consider pausing during periods of difficulty in honouring ECS mandates. Similarly, frequent withdrawals hinder the compounding effect on valuations, rendering the acquired units ineffective in meeting financial goals. Such actions can significantly damage financial planning.

Reacting to Market Crashes

Market downturns actually present opportunities for long-term wealth creation. However, many investors react by withdrawing their investments, often at a loss or minimal profit.

Adhil Shetty, CEO, Bankbazaar.com, says, “To achieve long-term financial goals, it’s crucial to control emotions and focus on the predetermined investment horizon. Market crashes, typically short-lived, offer opportunities to expedite wealth creation. Redeeming units during a market downturn resets the investment journey and makes restarting long-term investments challenging.”

Chasing Top-Performing Funds

Many investors tend to invest in funds that have recently outperformed, overlooking the fact that past performance doesn’t guarantee future success. Shifting from the existing schemes to top performers isn’t always the best strategy. Rather than continually switching schemes, a wiser approach is to allow a minimum of 2-3 years for a scheme’s performance evaluation. Fund performances follow their cycles, influenced by portfolio construction and fund managers’ convictions. Reassessing schemes too frequently can lead to missed opportunities as the fund one moves away from might become an outperformer, while the newly-chosen one might slip into underperformance.

Avoiding these common mistakes can significantly enhance the effectiveness of mutual fund investments, enabling you to align your strategies more effectively with your financial goals.

2023-12-15T11:47:18Z dg43tfdfdgfd