Do You Make These Mistakes When Investing in Equity Mutual Funds?
The sharp correction in March 2020 and the faster recovery that followed attracted many investors to the equity market. The majority of them invest through mutual funds. I want to warn these new investors about the mistakes newbies make when investing in mutual funds. Let’s discuss some of the major mistakes.
Make investments without tying it to a financial goal
Your investments should always be linked to specific financial goals. It could be your children’s education and marriage, buying a home, vacationing abroad, or even your own retirement. If there is no goal, wealth creation is also a valid goal. The income from the investments will differ depending on the duration of the objective, the criticality and flexibility of the objective. A trip abroad or buying a house can wait, but your children’s education or marriage cannot. Since the accumulated body of equity needs to be shifted to a safer product as the goal gets closer, this can only be done if investments and goals are linked.
Expect unrealistic returns
The recent rally has led people to believe that stocks can still give superlative returns and have set their return targets very high. You need to be realistic about the returns that your mutual fund investment would generate. In my opinion, your equity mutual funds should offer you a return around inflation + 6% in the long run and we should be happy with that.
Expect constant short-term returns
Investing in stocks gives you higher returns in the long term, but in the short term it can even cause you losses. So, expecting consistent returns like a fixed deposit from a stock investment is the mistake many novice investors make. One should be aware that the returns here are not constant and are volatile, so the product is risky for a short time.
Treat the dividend option as regular income
Any dividend paid to you in a mutual fund is effectively paid out of the net asset value (net asset value) of your fund and thus comes out of your pocket. The net asset value of your plan decreases after the dividend by this amount. In addition, dividends are taxed at the rate of your tranche but if you go for the growth option while investing in mutual funds, short term profits are taxed at 15% and long term gains benefit. ” a total exemption up to ??1 lakh and the balance is also taxed at the preferential rate of 10%. So, for those with higher taxes, it makes sense not to go for the dividend option. However, there may be situations where opting for the dividend option may be advantageous. Please have it assessed by your tax advisor beforehand.
Non-diversification or over-diversification in fund houses and systems You shouldn’t put all your eggs in one basket. This philosophy must be implemented by allocating assets while investing. While investing, it is important to diversify asset classes, such as stocks, debt and gold. In addition, the assets must also be rebalanced periodically. If you follow the principle of asset allocation and do periodic rebalancing, you will certainly be able to maximize your returns. Thus, if one does not follow the asset allocation, even a major correction in the asset class can lead to the erasure of profits and can lead to losses as well as different asset classes do not evolve. always in the same direction.
Even when investing in mutual funds, you should diversify your investments between mutual funds and different categories of funds. Ideally, you should not have more than five equity programs in the portfolio. You also don’t have to invest in every program that works well. You can swallow all of the sea.
Do not periodically review the performance of investments
Periodically reviewing your investments is the most important part of the investment journey. Even when you tie your investments to a specific goal, you should still check the performance of your investments to see if they are progressing at the expected rate, otherwise you may need to increase the amount of investments or moderate your goals. Please note that over-editing is also detrimental. You should not review the performance of your stock programs every month and take corrective action. Ideally, you should review it once a year.
Invest in mutual funds on the basis of net asset value (net asset value)
Novice investors rate stock programs based on their net asset value and programs with lower net asset value seem cheaper to them and this is the reason why many investors rush to subscribe to NFO (New Fund Offer). at a net asset value of ??ten.
Trying to time the market
Novice investors usually panic when the market corrects and withdraw their investments and halt their ongoing investments through Systematic Investment Plans (SIPs) fearing a further fall. As the saying goes, you should be greedy when everyone is afraid and be afraid when everyone is greedy. The correction is a good time to invest more rather than withdrawing your investments.
Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on Twitter.
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