4 Mutual Fund Mistakes Investors Are Making Right Now
Understand that Mutual Fund returns can come in fits and starts, and expecting linear growth is unrealistic
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Each new phase in the equity and debt markets invite a unique set of follies from retail investors - some small, and some catastrophic! And make no mistake - 2018 has been challenging for all categories of Mutual Fund investors; and particularly for the hordes of newbies who thronged the AMC's after Equity Mutual Funds, overall, had an impressive run in 2017. Here are the five most commonly observed mistakes that Mutual Fund investors are making right now.
Stopping their SIP's
The industry SIP book has grown in leaps and bounds in the past three years, going past the 6,000 Crore/month mark this year. However, most investors who started their SIP's in the latter half of 2017 are sitting on flat-to-negative returns right now - and that can be frustrating. However, it would be a mistake to stop your SIP's right now. Equity Mutual Fund SIP's can, in fact, give you extended periods of low returns, but it all gets averaged out in the long run.
The impatience of the average retail investor is growing, as equity markets have been range bound throughout 2018 after having a stellar run in 2017. Debt markets, on the other hand, have been downright bearish for a year now. First time investors who migrated away from the safe haven of guaranteed return, traditional asset classes are beginning to feel the heat. However, it would be a grave mistake to act on the basis of impatience. Make a better effort to understand how Mutual Fund returns work, instead.
Not following an asset allocation strategy
It's a disturbing fact that the bulk of retail investors who have invested into Mutual Funds in recent times have done so keeping only one thing in mind - the past one year returns from equity mutual funds. However, the time for linear returns from equity mutual funds is over, and we could even be on the cusp of an extended time-correction in the equity markets as growth catches up with valuations, and the uncertainty of the impending general elections looms large. Make sure you don't go hook, line and sinker into equities - follow a planned asset allocation between equity and debt-oriented funds instead.
Not resetting their expectations
"Past performance is not indicative of future returns", is what all Mutual Fund advertisements clearly state. However, there's an ocean of difference between listening to a message and actually understanding it! Retail investors are making a big mistake by not resetting their expectations with respect to future returns. In other words, anchoring yourself to past short-term returns earned by mutual funds, and expecting the same number on the short term for yourself, can set you up for disappointment and lead to irrational decision making. The correct approach to setting expectations is this: take the returns earned by a particular Mutual Fund over the long term (defined as 5 years or more) and then set that number as your return expectation over the long term (not in the next 6 months!). Understand that Mutual Fund returns can come in fits and starts, and expecting linear growth is unrealistic.
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