Mutual fund investors who wish to get higher returns on their investments often invest in equity funds Equities manage to bring in big returns from time to time as they invest the investors’ money in the stock market. As the equity funds have market links, they start performing badly whenever the market experiences a slide.
It’s common for investors to panic whenever the markets have a downfall. This panic often ends up having a strong negative impact on the decision-making ability of these individuals. They keep making decisions that bring in bigger losses for them than what the temporary slide in the market could have caused.
Investors, who are wondering how to protect their investments when their funds are not doing well, should first know the mistakes they should never commit in such situations. The section below will introduce you to some of the worst mutual fund mistakes.
Mistake 1: Losing Calm and Taking Drastic Steps
This is possibly one of the most common mutual fund mistakes committed by investors and thus it’s also among the most common causes of mutual fund debacles.
You must understand that stock markets typically perform satisfactorily over a long period. However, volatility may cause the price of stocks to fluctuate, which may result in some short-term hitches. A short-term issue in the market can indeed make you lose some money. However, if you consider the long-term consequences of those problems, you will find that you are not getting any more negative returns after holding your investments for three to four.
Making a drastic decision and withdrawing your investments will be the worst thing you could have done for managing the market crisis. This stands even truer for people who have 7 to 10 years left for the investments to attain maturity. Under no circumstances, these people should get bothered by what the media and media-hired experts are uttering.
Mistake 2: Redeeming Without Thinking Twice
If you are looking for effective mutual fund tips, here’s the most crucial one for you. Never redeem your investment in haste.
Is it possible to get negative returns on your mutual fund investments when the market is falling? The answer would be, “Yes”. However, that doesn’t mean that you will redeem everything you invested.
One big reason why redeeming shouldn’t be the way to go is that you may need to pay a significant fee for such redemptions.
For instance, when redeeming an equity mutual fund that you invested in just a year back, you will have to bear an exit load of as much as 1%. That’s not all. You may also need to pay an amount as LTCG (long term capital gain) tax if you gained more than Rs 1 lakh from the investment during a particular financial year.
There are investors, who believe that they can redeem when the market is not performing well and again invest the amount when the value of funds again starts to rise. This might appear to be exciting theoretically, but the trick doesn’t yield favourable results. On most occasions, people waiting for their funds to climb again fail to time their investments perfectly. What happens is that they end up selling their funds when their price falls and invest again when the price is much higher compared to what it was when they sold the funds. This proves that the decision of redeeming would be a disastrous one and can harm the process of wealth creation quite badly.
Hence, redemption is never a good way of managing your investments in tough times. You can, however, take the route of systematic investment plan or SIP for investing in equity funds. The biggest benefit of adopting SIP is that it will free you from all worries associated with market timing. Additionally, SIP will also allow you to buy extra units if the market experiences a slide.
Mistake 3: Not Comparing Your Fund’s Performance with Other Funds Belonging to the Same Category
There may be times when your fund’s performance has nothing to do with the market condition. This statement might appear to be a bit confusing to you, but the explanation below will surely clear your doubts.
If you are not sure why your fund is failing to give you expected returns, you should compare its performance with other similar funds. To be more precise, you should carry out a comparison of your mutual funds with funds belonging to the same category. Ideally, you should find the highest rated mutual funds in the category and then check how well or poorly they are performing.
You shouldn’t be bothered if the performance of your funds is slightly poorer compared to the high-rated ones. That’s because such differences wouldn’t matter in the case of a long-term investment option like mutual funds. Consider switching only if the difference is remarkably vast.
In the case of funds belonging to the same category, there might be some differences in performance for a short duration. However, when it comes to long-term performance, funds of the same category typically deliver similar results.
Mistake 4: Not Comparing Your Fund’s Performance with Other Funds Belonging to Different Categories
Mutual funds belonging to certain categories tend to be more volatile. To put it more bluntly, some funds might yield great returns, but they also impose much greater risk. If you have invested in one such fund, you should become slightly careful when the market is not doing well. However, don’t redeem without doing enough research.
If you think that the risk would be too much for you, check how mutual funds belonging to other categories are performing. Let’s explain with an example. Small-cap funds are known for yielding extremely high returns. However, they are among the riskiest funds to invest in. Large-cap mutual funds, on the other hand, are much less risky compared to the small-cap options. So, if you want to lower the risk, you can consider switching from small-cap funds to the large-cap ones.
Mistake 5: Not Researching the Sector Well
Like most of the above mutual fund tips, this one will also talk about the importance of research for protecting your investment.
Your mutual funds might fail to deliver the desired results because you made sector-focused investments. You should consider this point when making an assessment only if you have put your money on sector funds. As their name suggests, a sector fund invests just in a particular industry or sector.
There are times when you may find that your sector fund is not doing well even when the market is showcasing a good performance overall. This is happening most likely because the particular sector your fund belongs to is suffering. This feature makes sector funds the riskiest investment options as far as mutual funds are concerned. Predicting sector funds is even more difficult than predicting equity funds.
So, if your sector fund is not performing satisfactorily, carry out thorough research to gather enough information about the status of that particular industry. Also, perform a detailed assessment to determine the sector’s prospects. If the industry appears to have a great future, don’t redeem the investment. However, if you find that there’s no possibility of the industry to recover anytime soon, redeem the money you invested without any hesitation.
Mistake 6: Not Diversifying Your Investments
The advice of diversifying will make any list of best mutual fund tips. That’s because diversification of investments is possibly the only way of avoiding loss of money from mutual fund investments when the market is down.
Here’s how you can diversify your portfolio. If the portfolio consists only of equity funds, consider adding a few liquid funds. The liquid funds will help in balancing the losses incurred because of the equities. What’s more, they will also ensure that you can raise enough money to fulfil your short-term goals.
You can also consider diversifying by investing in asset classes. For instance, you can put some of your money in gold. This will keep you protected against the volatility of the market as the price of gold tends to rise when the market hits the bottom. For best results, we would advise you to allocate around 5% of your investment to gold. This will help you to recover a large part of the amount you will lose in case of a market downfall.
Final Words
You must understand that the market cannot keep underperforming for a long time. Such drops in performance can occur for several reasons. The most common ones among them are geopolitical chaos, elections, pandemics, recessions, etc. The duration of these events may vary; however, none of them can be permanent. So, you will have to learn to wait for things to get back to normal.
We make mutual fund mistakes because we tend to react too much to nominal turbulences in the market. However, the fact is that ups and downs are an intrinsic part of mutual fund investments. So, if you get panicked whenever you see your portfolio turn red, you will never be able to achieve your goals of long-term asset creation.