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Five mistakes to avoid while investing in Mutual Funds

Most of us start investing with one intention: to make more money. But usually what we see is that people lose more than they make in the process. Why is that? An unscientific answer we hear is that the share market is like gambling. Not only is this inaccurate but also spreads a false perception of what goes on in the share market.

Mutual funds are popular at present for the convenience it offers in terms of financial freedom as well as ease of transaction. How do we make sure that we do not lose our precious earnings in the eagerness to earn more? We will definitely look at the mutual fund’s performance. But do we need to do more? We are going to discuss here the five most common mistakes people make while investing in mutual funds and stock market at large.

1. Acting on Random Advice.

Investment is a decision that can make huge ripples in your life. Your investment decisions can decide how you live a few years down the line. When it may have such a huge impact on your life, would you outsource this decision to some random individual? Even if the person is a well-wisher and has our best interests in mind, they might not understand your objectives and capabilities well enough to choose for us. Since it is your money and the risk is also yours, the decision should solely be yours. You may seek advice, but follow up with your own research before you make a decision to invest in mutual funds.

2. Parroting Famous Investors

A lot of times when people start investing, we try to copy those who are already successful. Especially if we idolize somebody, we try to imitate them in the idea that somehow that will make us as successful. This is a mistake, because time has passed and circumstances are different. Merely by looking at one’s portfolio, it is not possible to trace their investment journey, however glorious it may be. For example, you cannot tell at what price the investor bought the stocks they own. If you merely copy them, you might end up in losses.

3. Acting on Emotions

When we invest in a company or business, a folly we make is to become emotionally attached to it. When we are emotionally attached, we cling. This makes it especially difficult to exit when the time is ripe. If you don’t sell at the right time, or worse, keep buying due to emotional bias, then you might have to deal with heavy losses. Do not rush to cancel your SIP at the drop of a hat. Take time to think it through.

4. Being Impatient

On the other hand, being impatient is as toxic as not acting at the right time. Buying and selling at whim will only result in losses too. To be patient and deciding to stay invested instead of selling short is a virtue of a wise investor. Panic is not. Keeping calm through anxiety inducing market cycles is important. Staying invested in mutual funds will help you iron out the losses. A Systematic Investment Plan or SIP can help you stay invested and disciplined.

5. Under-diversification

Let’s explore diversification through an example. Imagine buying stocks is like buying fruits. You invest your money on the whole and if the fruit turns out to be bad, you incur losses. Diversification in mutual funds is like buying a salad instead. It will have more value and less risk. Diversification has its own advantages and disadvantages. Over-diversification effectively results in decreased returns whereas under-diversification might prove disastrous. Research which are the best mutual funds to invest and diversify your investment portfolio to the optimum.

This is in no way an exhaustive list. Every investor has one’s own journey filled with successes, failures, mistakes and lessons. It is important to learn from our own mistakes as well as mistakes of others. It is rarely smooth sailing in this field. Investing is a journey that requires patience and knowledge in equal amounts. Happy investing!