If you so much as search the term ‘mutual fund’, you get bombarded with various mutual fund tips, ads, etc. It is important to focus on your investment goals and needs rather than going after the recommended and seemingly attractive schemes. Yes, knowing how to avoid a few mistakes while fund selection is a crucial step. Here are a few mistakes to avoid before investing.
1. Do not get swayed by unfounded suggestions
Most investors, especially first-timers, invest based on what their peers recommend them. However, what works for Ram may not work for Shyam and people often end up making the wrong choices. A small-cap oriented ELSS may have worked for your trader pal in 2018 – it may not give you the same results not only because of market fluctuations but also due to your different financial goals and risk appetite.
2. Do not choose based on rating alone
Mutual fund rating is only one parameter among many. It is better to check returns and ratings for (at least) 5 years to get an idea of how the fund performs across various market cycles. For instance, an ELSS may deliver extraordinarily high returns during market high. But such funds often fail to be a consistent performer in subsequent years.
3. Do not overlook the importance of fund tenure
Sometimes, investors select an equity fund with the highest annualized returns without a care for their financial needs. Say, if you need a bulk amount of 5 years down the line (for milestones like buying a home, child’s college education, etc.) and choose a fund with a high one-year return track record. What if the market crashes after the first year?
4. Do not invest in the ‘cheapest’ fund available just because it’s cheap
Expense Ratio or the fee to the fund house for managing your money is often regarded as a negative parameter, particularly by investors who are a tad more experienced. If the mutual fund underperforms mostly, saving on expense ratio is not going to help you.
5. Do not lose sight of your affordability and goals
Choosing mutual funds is not simple but if you know your timelines and goals, you have the most important starting point when it comes to choosing mutual funds. Don’t get swayed by short term performance. Focus instead on the consistency of returns over the long term.