Five Mutual Fund Pitfalls to avoid

Pitfall #1: Going it alone

Whether you’re a seasoned investor or a new one, the support of an unbiased, competent mutual fund investment planner can prove invaluable during these times. With the geopolitical environment continuing to remain uncertain, things are likely to be choppy over the next few months. A trusted mutual fund investment planner can help you arrive at a robust investment strategy, select a good portfolio of funds, and save you from common behavioural pitfalls as well.

Pitfall #2: Overextending your Equity SIP’s

With all the recent media attention that SIP’s are receiving, you may be tempted to overextend yourself with your monthly SIP investments. However, it’s a mistake to commit an uncomfortable sum of money every month into Equity MF’s via the SIP route. Stick with a number that doesn’t prompt you to look at your portfolio with trepidation every day. Typically, a figure that’s equal to less than 20% of your net monthly income works best. Your monthly SIP outgo must be planned in such a manner that you don’t have to stop and start them periodically – doing so nullifies their biggest benefit.

Pitfall #3: Transitioning from FD’s to Balanced Funds

Stung by poor post tax returns, many former FD investors ended up moving to dynamic asset allocation funds that afford them higher tax efficiency and have delivered impressive returns in the past one to three years. However, this is a mistake. There are no free lunches in the investing world, and Dynamic Asset Allocation Funds are risky - many of them have fallen anything from 30% to 50% during severely bearish markets, in the past! Make sure you move your FD money to debt funds only – and that too, after consulting with a mutual fund investment planner who understands the dynamics of the fixed income markets.

Pitfall #4: Getting locked into NFO’s

Investors, especially those who are prefer their mutual fund advisor online, must be cautious of investing into close-ended NFO’s (New Fund Offerings) that enforce hard lock-ins on their moneys at this stage. Locked-in NFO’s may also prompt you to take irresponsible investment decisions as soon as their lock-in periods finish, in case their mandated lock-in periods finish amidst during a bear market. It would be much more prudent to stick with open ended funds with an established track record.

Pitfall #5: Deploying lumpsums into equity funds

What any good mutual fund investment planner will tell you is that what goes up, comes down – and the riskier the fund, the faster it will fall. It would be far more prudent to invest into an equity fund using a 9 to 12-month STP (Systematic Transfer Plan) to complete your deployment.