Don’t Invest into mutual Funds

Over a period of time mutual funds have become investors’ best choice as they offer best risk
adjusted returns beating other investment instruments like Fixed deposits, properties and gold. But
don’t invest into mutual funds if you are investing into mutual funds just by doing a google search
“best mutual funds to invest in 2024”. What will you get in that search is the list of mutual funds that
have performed well in the past; may be during last 1 year. Though there is always a disclaimer
related to mutual fund investments “The past performance of the mutual funds is not necessarily
indicative of future performance of the schemes” still most of the DIY investors fail to understand
the importance of this disclaimer and invest blindly into schemes that has performed well in the past
without even considering the real objective of their investments.

Most of investors leave the investment opportunities that this market offers because of the bitter
investment experience that they had on the basis of google search or just investing through various
investments apps without much of investment knowledge.

By investing on the basis of past returns such investors tend to set unreasonable expectations from
these investments. Investors tend to overestimate their ability to manage investments on their own
but when market turns volatile & funds are not being able to deliver past returns such investors
leave the markets with bitter experience.

If you want to start your wealth creation journey than no doubt mutual funds are the best
investment choice. But as an investor you should avoid committing following mistakes while
investing in a Mutual Funds.

  1. Investing without a clear goal
    Imagine you go & sit in a train without knowing where it’s going; then will you ever
    reach your destination? No. Setting a clear goal with investment horizon is very
    important before you start your investment journey into mutual funds. It brings
    discipline and patience into investments and investor can very easily ride short term
    volatility with clear goals in mind.
  2. Investing without proper knowledge of mutual funds
    Mutual Funds offers a plethora of investment options for different categories of
    investors and investor must choose a right mutual fund scheme based on their risk
    appetite and investment horizon. Mostly people start investing in mutual funds without
    understanding the scheme’s objective & risks associated with the underlying schemes.
    Investors must do their risk profiling before starting their mutual fund journey.
  3. Investing based on past returns
    Past returns just give investor a fair idea of scheme performance but in no way that
    guarantees that performance will continue in future also. This can be tested very well
    from top performing funds ranking three to five years back. Current period top
    performers were not top performers in the past. Equity funds performance is affected by
    many parameters like market cycle, sector performance, investing style & many more.
    Past performance can be a good measure to evaluate a fund but one must look at other
    quantitative and qualitative parameters also like consistency, risk management and fund
    house track record.
  4. Relying on tips or advice from friends or media
    Imagine what will happen to your health if you are taking a health advice from an
    engineer or a lawyer. Though they are expert in their fields but they are not investment
    experts and remember investing based on such advice can drain your hard-earned money.

Let’s look at a scenario, Ramesh got inspired by his friend Sunil’s Mutual Fund
Scheme Performance. Sunil has invested into small caps during bull run & his returns
were looking very attractive, he also advised Ramesh to invest into mutual funds and
Ramesh invested in the same scheme but to his surprise he lost 5% in just one month as
market turned bearish and those funds took maximum hit. Similarly, internet is flooded
with unsolicited advice of top performing funds but they never set the relevance of
those funds related to individual investment objective.