One of the smartest and easiest ways to grow your wealth is by investing in mutual funds. But in the end, like all investments, it takes a bit of patience, discipline and planning.
Most new traders make small mistakes which add up over time and ‘leak’ profits.
Here are some of the common mistakes investors make when buying mutual funds – and how to avoid them.
1. Investing Without a Goal
A large number of beginning investors who invest in mutual funds do so for no other reason than they have friends (or colleagues) who are invested in mutual funds – and they don’t really understand why.
But investing without specific goals in mind is like driving without a destination.
How to Avoid:
Identify your financial goals – buying a home, saving for education, preparing for retirement – and pick funds that have the right time frame for your goal as well as an appropriate level of risk.
2. Expecting Quick Returns
Mutual funds are not “easy money” operations.
You are “upside down” in only the first 5 or so years with interest rates that don’t adjust for 10 years (they then have a modest adjustment cap). Some bot traders panic if, after a few months, they don’t see big profits and pull out too soon.
How to Avoid:
Be patient. Mutual funds are best when you remain invested for a long time (5 years and above).
3. Ignoring Risk Tolerance
Each mutual fund has different levels of risk.
And many of the first-time investors are putting all their money in equity funds, without thinking of whether they can take market ups and downs.
How to Avoid:
Determine your risk-tolerance comfort zone.
If safety is your priority, you should select the debt or the hybrid class of funds. If you can stomach ups and downs in markets, equity funds are just fine.
4. Stopping SIPs During Market Lows
When markets are declining, fearful investors halt their SIPs – the worst time to do so!
SIPs actually buy a larger number of units when prices are low and fewer when prices rise, enabling you to grow faster once the markets recover.
How to Avoid:
Don’t stop your SIP even when the going is tough. It is the secret to long-term wealth creation.
5. Not Reviewing Investments Regularly
When you begin investing, it can be easy to “set it and forget it.” But tuning out your investments entirely can damage performance.
How to Avoid:
Evaluate your mutual funds every year or two. Swap chronically underperforming funds, and periodically rebalance your portfolio if your goals evolve.
6. Chasing Top-Performing Funds
Many beginners only invest in funds with the highest short-term returns.
But a top fund today may not remain there forever.
How to Avoid:
The most compelling returns are always in the other direction.” Before you invest in a fund, review its 3- to 5-year performance.
7.Ignoring Tax Implications
Some investors overlook the point that mutual funds are taxable. Shorter holding periods are also subject to tax at different rates than longer holds.
How to Avoid:
Understand the tax rules:
- Equity funds: For short-term (under 1 year) = 15% and for long-term (1+ years) = 10% on profits above ₹1 lakh.
- Debt funds: As per your income slab.
8. Not Diversifying
There are risks to concentrating all the money in one fund or type of fund.
If that fund lags, you get dragged down with it.
How to Avoid:
Spread your money across3–5 funds — mix of equity, debt and hybrid will ensure combination of risk with return.
FAQs:
Q1: How often should I check my mutual funds?
Every six to 12 months is often fine for most investors.
Q2: May I stop my SIP any time?
Yes, you can pause or stop your SIP without any penalties in most mutual fund platforms.
Q3: Is investing in mutual funds online safe?
Yes, provided you use the known platforms like Groww, Zerodha or official AMC sites etc.
Q4: What’s the No. 1 mistake investors make?
Pulling out too soon and missing the magic of compounding.