Planning to invest in mutual funds? Avoid these common mistakes

Reports suggest that inflows into equity mutual funds, which saw huge investor interest during the past few years due to rising stock indices, have fallen for the third straight month in January 2019. Equity fund inflows, including tax-saving funds, stood at a two-year low of Rs  6,158 crore in January.

 
While volatility and the relentless dip in indices may be unnerving for the ordinary investor, stopping the systematic investment plan (SIP) in a knee-jerk reaction isn’t the best idea.

Stopping SIPs:

“Volatility is an inherent feature of the equity market, but as an asset class, it beats others and inflation by a wide margin over the long term. Those with existing SIPs should continue with them as that would average their investment cost and help them reap higher returns over the long term,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

In fact, equity mutual fund investors should exploit such opportunities by topping up their existing SIPs with fresh lumpsum investments in a staggered manner. “Historically, equity fund investments made during bear markets have registered disproportionately higher returns than those made during bull markets. Hence, investors should make the most out of the bear market phases by raising  investments,” says Kukreja. 

Kaustubh Belapurkar, director, fund research, Morningstar agrees. “Market downturns are always a good opportunity for investors to top up their investments, especially if they are under-allocated to long-term investment classes like equities and equity mutual funds. Investors should use these opportunities quite actively as this will pay off handsomely in the long run,” he said.

Getting flustered by short-term movements:

If you are one of those equity mutual fund investors who gets unnerved by short-term volatility, you are committing a mistake. To make the most of your equity mutual fund investments, you should have the patience and strength to ride out short-term volatility. “Focusing on short-term performance, rather than looking at longer-term returns is a common mistake investors commit during bear phases of the market. It is also not wise to redeem the equity investments, which are meant for the long term,” says Belapurkar.

Timing the market: 

The equity market is full of uncertainty and risk. Even the most seasoned investors would find it tough to catch the bottom or predict the top. If you are trying to time the market for entry or exit, the chances are that you would more often than not be caught on the wrong foot. 

 
“Investors should not try and time the market. You could be caught on the wrong foot,” says Vijay Kuppa, co-founder, Orowealth. Thus, if you pull out money and the market suddenly picks momentum, you would lose the opportunity to make gains. Hence a systematic approach towards investing is the best way to create wealth.

Messing with asset allocation:

Investment experts say investors should avoid the mistake of panicking in situations where the fund portfolio value continues to shrink on account of sliding stock market and shift their investment into safe instruments with low returns. “Market downturns are always a good time for investors to relook at their portfolios and rebalance the portfolios to match their desired asset allocation as per their risk-return objectives. However, one should not move all investment into risk-free assets in a hurry. There is no need to get excessively defensive or aggressive at such time. Keep your ideal asset allocation in mind and stick by it,” Belapurkar says.

Kuppa advises review and rebalance of the portfolio. “Rebalancing is important. It is important to get the asset allocation right. Many investors would have allocated exposure to mid- and small-cap funds based on the recent performance of these categories and without taking into account the risk profile. The rebalancing can be done based on one’s overall investment objective and time horizon,” says Kuppa.

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