Mutual Fund Investment Traps to Avoid Right Now
Vibrant markets tend to spawn many a self-advising ‘expert’, and that’s a phenomenon that proliferated widely in the years between 2012 and 2017. Equity markets rose (albeit with its share of jitters in between!) prolifically in this period, with the bellwether NIFTY index more than doubling from 4,800 to 11,000 levels. At the same time, bond markets delivered excellent returns in the 3 years between 2014 and 2017, on the back of multiple tailwinds such as low inflation, falling crude prices and global economic weakness.
Resultantly, many investors who even employed nothing more than a ‘spray and pray’ strategy for portfolio building succeeded by chance; and their false confidence rose – only to be buffeted by the tumult that both stock and bond markets witnessed in recent times. Debt Funds, overall, fared poorly in 2017 – and equity markets have been up and down since the FM rolled out the recent Union Budget back in January.
If you’ve made a Mutual Fund investment recently, don’t fret over the recent volatility – that’s part and parcel of risk-on investing. Just make sure you avoid these all too common Mutual Fund Investment traps.
Loss Aversion
You may have made an investment which is now in the red by a few percentage points. If you’re feeling iffy about your investments as a result, you’re facing what is commonly known as the “loss aversion bias” in behavioral investing parlance. Don’t be in a hurry to exit just because your investment isn’t in the black – let asset allocation and your risk tolerance guide your decision making instead.
Conformation
Another all-too common trap that could befall those making Mutual Fund investments right now, is the phenomenon of staunchly refusing to budge from a pre-existing point of view. Those who have grown accustomed to seeing only profits in the past 4-5 years are particularly susceptible to this, and this could skew their asset allocations wrongly, uncoordinated with their goals and risk profiles.
Past Returns-Based Investing
How to select a mutual fund: open any research portal, sort by one-year returns, and go for the one that figures at the top! Right? Wrong! Past returns-based investing won’t get you too far in mercurial markets such as these. Constantly shifting trends mean that what fared poorly last year may just rebound this year, and vice versa! Best to consult with a professional,qualified Financial Advisor to select a mutual fund investment now.
In and Out
Those who made Mutual Fund Investments with misplaced expectations of linear returns will face the common ‘in and out’ trap, wherein they may be quick to invest – as well as ditch – a particular investment based in its short-term performance vis a vis their expectations. Eventually, this will work to their detriment. Discipline and asset allocation is the key at the moment – spend time in portfolio selection, do your homework well, and then stick to your decisions until something fundamental changes drastically.
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