Saving and investment have become integral for a secured financial future. One of the popular investment products is mutual funds. Choosing mutual funds isn’t as complicated as one believes it to be. There are online platforms that help by suggesting the funds that best suit an investor. Not always do the investors choose advisors to invest in mutual funds. They often commit mistakes while choosing mutual funds. This is how mutual funds shouldn’t be picked for investing.
1. Chasing past performance
Investors often look at a fund’s past performance before choosing to invest in it. While past performance can be a reference as to how the fund performed during different market scenarios it cannot be the only factor to rely on for selecting a fund. Just because a fund’s 3 year performance is high doesn’t mean it will perform well in the next 3 years too. One can narrow down their choices based on past performance but cannot select mutual funds based only on it.
2. Choosing mutual funds based on word of mouth
Most of the times investments are done just because the others did it and asked us to do so. Just because a group of people or your best friend invested in one fund doesn’t mean you should invest in that fund. What may suit them may not suit you. Keep your goals in mind before you pick a fund to invest in. Don’t go by word of mouth.
3. Choosing mutual funds based on short-term performance
Choosing funds based on 1-year or 6-month performance is not right. During a market rally all the funds tend to perform well. One has to align their investment horizon with that of the fund’s past performance to narrow down the funds. Funds that perform consistently even during a bear market are the real gems one should look out for.
4. Choosing mutual funds without analysing your financial situation
One needs to know what their goals are and convert them into numbers in terms of the amount needed to achieve the goal and the time to achieve it. They also need to know their current financial situation. By financial situation I mean their salary, expenses, debts (if any) and how much risk are they able to take. Investing in mutual needs aligning goals, risk and time horizon with that of a mutual fund that satisfies all these.
Once the funds are picked another common mistake that investors commit is to time the market. Timing the market to invest in mutual funds is not needed if one is investing through SIP. SIP and long-term investing is an excellent combination for wealth creation.
Remember the time you stay in mutual funds matters rather than the timing of the market!