Investing in mutual funds can be a powerful way to grow your wealth, but it requires patience and discipline. Many beginners, driven by the desire for quick returns, make avoidable mistakes that can hinder long-term growth. This guide highlights the most common mutual fund mistakes and how to avoid them.
1. Redeeming Too Early: Losing the Power of Compounding
Studies by Axis Mutual Fund reveal that nearly 49% of equity investors redeem their investments within two years, while only 18% stay invested for more than five years.
Why it’s a problem: Mutual funds need time to grow. Compounding works best over the long term, so early withdrawals prevent you from benefiting fully. Think of it like commuting to work: if you arrive too early, you just wait outside. Steady investment over time ensures you “arrive” at the right financial moment helping to avoid common mutual fund mistakes.
2. Stopping SIPs: Losing Discipline
Many investors discontinue their Systematic Investment Plans (SIPs) prematurely.
Why it’s a problem: SIPs average out your investment cost over time. Stopping contributions during market dips means missing out on potential gains, which undermines the very principle of disciplined investing.
3. Chasing Past Performance
According to Economic Times, only 18% of mid-cap funds consistently beat their benchmarks in recent years.
Why it’s a problem: A fund that performed well last year may underperform next year. Chasing past winners often leads to disappointment, similar to buying an overpriced old bike when a better, newer one is available.
4. Skipping Contributions
Missing a few SIP installments can significantly reduce your final corpus.
Why it’s a problem: Compounding only works if investments are made regularly. Skipping contributions breaks the growth chain, resulting in substantially lower returns over time.
5. Investing Without Research
Beginners often select funds based solely on past returns or ratings, ignoring risk levels, investment strategies, or tax implications.
Why it’s a problem: A fund may appear attractive on paper but may not align with your financial goals. For example, investing in a risky mid-cap fund when you seek steady growth can lead to avoidable losses. Always evaluate fund strategy, risk profile, and fund manager experience.
6. Not Reviewing or Rebalancing
Many investors invest and then forget their portfolios.
Why it’s a problem: Even top-performing funds can decline over time. Without annual review and rebalancing, you may hold underperforming funds or portfolios that no longer match your objectives. Regular checks help keep your investments on track, or you can consult a financial advisor for guidance.
Conclusion
Mutual fund investing is a journey that rewards patience, discipline, and informed decisions. Beginners should avoid the following common mutual fund mistakes: early redemptions, discontinuing SIPs, chasing past performance, skipping contributions, investing without research, and neglecting portfolio reviews.
By staying disciplined and consistent, you can avoid common mutual fund mistakes that befall new investors. With ProfitsZone, the best mutual fund advisors in Vijayawada, you can rest assured that such pitfalls won’t stand in your way.