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Business News/ Money / Personal-finance/  Avoid mutual fund mistakes by following these steps

Avoid mutual fund mistakes by following these steps

Research well, understand the basics and seek professional help for your mutual fund investments

If you are inexperienced in mutual funds, start small.Premium
If you are inexperienced in mutual funds, start small.

Mumbai: Gurugram-based Harini Gopalakrishnan, 28, who works as a consultant for an audit firm, started investing in mutual funds through systematic investment plan (SIP) in 2017. “Earlier, I used to put money in recurring deposits every month. On maturity, I used to convert it into a fixed deposit or use it for my personal needs. I got to know about mutual funds from my roommate," said Gopalakrishnan.

After reading about mutual funds on websites, she started putting aside 30,000 a month in mutual funds that focused on banking. A year later, she is extremely disappointed with the mutual fund returns. “My mutual fund investments are in the negative and I have already stopped my SIP. I am thinking of putting my money in infrastructure-focused mutual fund, as I feel the sector will pick up pace," she said.

Gopalakrishnan has made multiple mistakes already. Let’s go through it one by one. Also, here are some takeaways for those planning to start investing in mutual funds:

Educate yourself

After the mutual fund reclassification by the Securities and Exchange Board of India (Sebi), there are broadly over 30 mutual fund schemes in equity and debt fund. There are also exchange-traded and thematic funds. Understanding it may be difficult for a beginner. “As a new investor, you should be aware of large-cap equity funds, diversified funds, equity-oriented hybrid funds, short-term debt funds and liquid funds," said Srikanth Meenakshi, co-founder and chief operating officer, Large-cap mutual funds invest in large-cap companies in the market. In case of diversified fund, the fund manager invests all across the market, and it is more flexible. Hybrid funds have low-risk debt and high-risk equity. Short-term funds are low-risk funds that invest in debt, while liquid fund is to park money for a short period.

To know more about large-cap and mid-cap mutual funds, click here.

What should you do?

If you don’t understand mutual funds, seek professional help. “You go to a barber for a haircut. For medical problems, you go to a doctor. Similarly, financial planning, too, requires serious attention and professional help. Get a good adviser who can make a financial plan for you," said Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. Ltd.

Also read: Long-term mutual fund investors must review portfolio every year

Gopalakrishnan’s mistake was that she didn’t seek professional advice. It is almost impossible to time the market. Also, she didn’t give time for her money to grow. “You can’t grow a mango tree in two years. It takes 12 years to grow. Your portfolio won’t give you returns overnight just because you have taken professional help," said Shah. Don’t venture into riskier products if you don’t have the experience.

Also read: You can pause your mutual fund SIPs, and then restart them

“What do you do at a wedding where there are 50 food stalls? You mainly rely on experience. You opt for chhole bhature because you have had it in the past. Similarly, if you have the experience of investing in large-cap, mid-cap, small-cap and sectorial fund, you go by your experience. What if you are trying the food stalls at a wedding for the first time? Then, you first taste a bit, and depending on how you like it, focus on one. Similarly, if you are inexperienced in mutual funds, start small," said Shah.

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Updated: 15 Jul 2018, 09:30 PM IST
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