Sharp correction witnessed in the market in March 2020 and the consequent fast recovery attracted several investors to the equities and equity-related securities market. Majority of these investors chose to invest in mutual funds. However, these investors must be cautious about certain common investment mistakes when investing in equity markets. Are you aware of these common mistakes? In this article, we will understand certain such mistakes that might be detrimental to your investment portfolio.
Common investment mistakes when investing in equity mutual funds
Here are a few common investment mistakes that an equity investor often makes while investing in equity mutual funds:
- Not linking your mutual fund investments to financial goals
It is important to link your mutual fund schemes with your financial objectives – both short-term and long-term. These goals can be anything – buying a new bike or house, funding your child’s higher education and marriage, retirement goals, planning a vacation, etc. Basis your financial goals, risk profile, and investment horizon, you must draft a financial plan and choose mutual fund investment that align with your investment portfolio.
- Expecting unrealistic returns on mutual fund investments
Several investors invest in the equity markets with the hope of exceptionally high returns. However, this leads to false expectations and when the mutual fund scheme is unable to live up to the high hopes of an investors, it creates disappointment. However, having said that, if history is a proof of anything, equity mutual funds have often provided investors with double digit returns when invested for a longer duration.
- Hoping consistent returns from equity mutual funds in a short span
Sure, equity securities have the potential to deliver significantly high returns when invested for a long duration, however, the same might not be true for short duration. So, expecting consistent returns from equity mutual funds similar to fixed-income securities such as fixed deposits is a mistake new investors often make. Hence, returns on equity mutual funds are quite volatile and not consistent in the short run.
- No diversification or over diversification of mutual funds
All investors must be well adversed with the old-age investment saying – do not put all your eggs in a single basket. One must ensure that they implement this investment strategy while deciding their asset allocation strategy. An investor must diversify their mutual fund investments, including equity securities across location, asset classes, and sectors. Additionally, you must make a point that you rebalance your investment portfolio periodically as well. Diversifying your investment portfolio will help you to offset any losses arising from any one type of investment. However, you must ensure that you do not overdiversify your investment portfolio as well. It is advised to invest in not more than four to five different type of investment. Overdiversifying might result in losses for your investment portfolio as well.
- Investing in mutual funds basis their NAV (net asset value)
Investors new to the investing world often make the mistake of choosing mutual fund schemes basis the NAV of mutual funds. As a result, mutual fund schemes with a lower NAVs are more appealing to new investors.