Mutual fund is an investment tool by which a large number of investors invest small deposits of their hard-earned money expecting capital gains and higher returns. The prime motive of such an investment is good returns, which can only be achieved if investors select the right mutual fund according to their investment objective and risk profile. Choosing the best mutual fund is always tricky, but things can get worsened if you make a wrong choice. Here, we are discussing most common blunders people make while choosing mutual funds for their portfolio.
- Unclear Investment Goals: The goal defines your investment perspective whether you are willing to invest in volatile asset classes or play safe. One must be acquainted with the fact that each asset class has a different degree of risk-involved and thus different volatility and returns range. Equity is riskier with the capability of generating higher returns while debt and gold have lesser potential to generate great returns with low-risk involved. Thus, only definite investment goals can lead to good investments.
- No Risk-Vs-Return Analysis: It is a general tendency to get more inclined towards higher returns while not considering the risks involved. It is imperative to be aware of the risk-return correlation and choose mutual funds after proper risk profiling done. Risk profiling will help you to make a decision on investment allocation plan and put the right foot first. Lack of correct risk-Vs-return research may cause investors to lose faith in the product when unexpected risks show up.
- Wrong Impression about Meaning of Diversification: A shocking but highly common myth among general people is – the more funds you own, the more diversified your portfolio. A diversified asset allocation is the key to a good investment portfolio but the idea of diversification is highly misunderstood. Choosing a variety of funds from different fund companies is not diversification. You can choose one fund and be diversified if your fund manager invests it in wide array of securities.
- Get Fascinated by Attractive But Deceptive Advertisements: Investors also get trapped into fanciful advertising of less performing or non-performing funds publicized as high-growing funds. Funds best for you can only be found by deep research – no advertisement in newspaper or television can help you make best selection.
- Rely on ratings only: Many financial publications publish top fund lists and give ratings considering various performance signals – majorly past performance. A common investment disclaimer says “past performance of a fund is not an indicator of its future results” which itself makes relying on ratings chart very unpromising. Choosing best mutual fund requires investors to research on various factors like expense ratio, credit ratings, market sensivity, standard deviation, duration, and not just rating charts.
- Ignore Investment Objectives: Every fund manager outlines the strategy and works according to the investment objective of the mutual fund. The fund’s investment objective also gives investor an idea of how it’s going to work. It is crucial to realize if your personal investment objective matches the investment objective of the fund. An equity fund is different from that of a long term debt fund in terms of its investment objective as well and it requires the investor to have an apparent understanding of both to make a final good choice of fund.
- The Complete Idea of Past Performance: Mutual funds are subject to market risks and past performance does not guarantee future results. Well-performing funds in the past may work well next year, or may not. But completely ignoring the past performance is also not expected – one is advised to possess consistently performing funds rather than funds that have given away impulsive growth in recent years.
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