What Is The Biggest Mistake That MF Investors / SIP Investors Make?

Oct 04, 2018 6:45 IST 1849 views

The biggest mistake that investors in mutual funds and SIPs commit is to invest in a manner that is not aligned with their goals. The idea of mutual fund investing is to move towards their long term and medium-term financial goals. This issue of alignment with goals is not a simple error but has a lot of sub-categories too. Here is what you need to avoid.

How to invest in Mutual Funds

Focusing Too Much Only On Equity Funds

Mutual funds are not just about equity funds alone. You have a wide choice that includes debt funds, balanced funds, liquid funds, gold funds etc. Even within the category of these funds there are a lot of granular sub-categories that are available to you. The idea is not to focus overly on equity funds alone. For example, a long-term goal can be best handled by diversified equity funds. But, a medium-term goal is better handled by a debt fund or a balanced fund. Similarly, short-term goals can be handled by liquid funds or ultra short-term funds. Debt brings stability and regular returns to your portfolio. Make the best of it!

Focusing Too Much on Returns and Too Less on Risk

When investors put money in mutual funds, the focus is too much on returns. Investors are obsessed by returns over a period of time, compared with the index, compared with the peer group etc. While these are essential, you need to focus a lot more on risk than on returns. At the end of the day, you control risk and no returns! Your focus must be on returns per unit of risk. Take an in-depth look at risk-adjusted returns that these funds are providing, with measures like Sharpe and Treynor.

Trying to Time the Market Through SIPs and Lump-sum

Investors are naturally attuned to timing the market. When investing lump-sum in mutual funds they try to catch the bottom of the market, knowing full well that it is a hard task. Even in SIPs, they try to increase the SIP when the market falls and reduce the SIP amount when the markets go up. This type of active management cannot really help you in the long run as in SIP investment time matters more than timing. Focus on discipline and regular investing and wealth creation will follow.

You Do Not Have to Do Everything Yourself; Consult an Advisor

Do it yourself (DIY) investing sounds quite exciting. Also, you have surely read blogs about how Direct Plans give greater returns compared to Regular Plans. As an investor, don't try to do everything yourself. At times in the urge to save costs, you may be losing out on valuable guidance from your financial advisor. There are many algo based DIY software that will allow you to take your own decisions. You can use that as a starting point. It is always better to get customized advice from advisors. They can surely add a little more value beyond what robots can do.

Losing Patience along the Way

This is a cardinal mistake that many investors commit along the way. When you lose patience, you are forced to take short-term decisions that do not get with your long-term goals. In mutual fund investing it is time that works in your favor and not timing. Try to focus on maintaining discipline and keep your patience through the cycles of the market. You get the best returns if you keep patience through the market cycles.

Costs Matter, so Don't Lose Sight of Them

At the end of the day, costs do matter. This is more so when it comes to debt fund and index funds where even a few basis points of cost saving can make a big difference to your effective returns. The cost must be a key consideration when you are adopting a passive strategy like ETFs, index funds, debt funds etc. Even when you are looking at equity funds, try to focus on the fund with the lowest TER (total expense ratio). As Warren Buffett also commented; costs do make a big difference in the long run to investors.

Diversify but Not Beyond a Point

Diversification is all about risk reduction. If all your money is in one or two asset classes then your portfolio returns are vulnerable to that particular theme. That is not a good idea when you are predicating your long-term goals on these investments. But diversification must be done intelligently. If you add the same kind of assets then you are doing risk substitution, not risk reduction. Risk reduction happens up to a certain number of assets. After that risk reduction plateaus!

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