It is wise to invest in mutual funds for your future rather than saving your money in fixed deposit. However, many people who opt to invest in mutual funds end up making costly mistakes. Make sure not to invest in mutual funds for the wrong reasons and avoid these mistakes that would otherwise prove to be deadly. Now let us see those mistakes in short.
Investing in mutual funds for dividends
Investing in an equity-oriented investment for the sole purpose of income generation is not a good idea. Most people opt to invest in mutual funds with the expectation of getting a regular monthly income. Though this is not a wrong reason, it is still not a good reason to start investing in mutual funds. This is because the funds that you choose with the goal of getting good monthly dividends may not continue to do good and the dividends paid may become erratic. A better option is to choose a good growth plan and then start a systematic withdrawal plan (SWP) after a year if you need regular income. SWPs not only provide a steady income but they also let investors modify the income as per their needs.
Starting SIPs for short term
Mutual fund investments, especially SIPs provide best returns only when people stay invested for five years or more. When you are starting a fresh SIP in an equity-oriented fund then make sure to stay invested for more than five years. If you are choosing a fund or starting an investment when the market is at its peak and exiting in less than five years, there is a very high chance that you will end up with a bitter experience. For example, a monthly SIP of Rs 10,000 for three years would fetch just about 11% annualized return, but if the investment period is five years or more then it would fetch about 19% annualized return.
Pausing SIPs midway
Stopping a SIP halfway, either due to expensive valuations or expecting any correction in the market will deprive your portfolio of the compounding benefits. This could result in a deficit of your targeted corpus for your specific goals. Investors should stay invested during stormy times so that they can ultimately gain when the markets bounce back. People should remember that opportunity lies in volatility when it comes to mutual fund investments.
Apart from these, it is suggested that you stick to the funds that you have already invested in even if they are not doing good. It is always better to seek assistance from your agent before investing in any new fund if you are not well versed with mutual funds. We will see some more mistakes that one needs to avoid while investing in mutual funds.