Common Mutual Fund Mistakes To Avoid For First-Time Buyers In India

 Do you intend to invest in Indian mutual funds since Sachin Tendulkar advised you that it is a "good thing"? It indeed is, as long as you have chosen the best mutual funds to invest in. And even before that, you must create an "investment objective.

Wonder what that means?

Trust the professionals when they say that while you are investing to grow your money through mutual funds, the technicalities of the procedure may simply overwhelm you.

InBest Mutual Fund Distributors in Kolkata advises passionate investors as well as the general public to be aware of "what not to do in mutual fund investments" in a bid to streamline the proper course of action.

A Brief History of Mutual Funds And It’s Position in India

The ease, flexibility, and benefits of diversification make mutual funds the most widely used form of pooled investment. Individuals can now start investing in MFs with as little as Rs. 100 thanks to India's over 44 registered mutual funds, which offer a variety of schemes and plans for investors. Below is a look back at the important phases in the history of the MF industry: 

• The European "investment funds" of the 17th century served as the model for pooled investing. 

• A closed-end fund, which only involved a fixed number of shares and frequently traded at prices above the portfolio's net asset value, may have been the first type of mutual fund in the world, established in the United States in the late 1800s. 

• The Massachusetts Investors Trust established the first redeemable open-end mutual fund in 1924.

• With the founding of the Unit Trust of India (UTI) in 1963 and the broad goal of bolstering the nation's economy with a financial market that allowed for mass involvement, the mutual fund industry emerged in India. 

• The UTI mutual funds retained a monopoly on the Indian mutual fund sector for more than 20 years until new financial companies and government-approved businesses began launching their own funds in the 1980s. 

In April 2023, the mutual fund industry in India grew to ₹41.62 trillion, a drastic leap from ₹20 trillion in August 2017. More than doubled in five years, even after sustaining the economic slump posed by the COVID pandemic.

When Investing in Mutual Funds, Watch Out for These Mistakes 

As the MF industry evolves at a rapid pace in India, there are several different types of mutual fund schemes, digital platforms, and modes of investment that appeal to all kinds of people. 

The Association of Mutual Funds in India claims that Indian investors must look beyond the traditionally preferred bank FDs and gold to mutual funds due to the nation's propensity for saving and wealth creation. However, a lack of awareness has led several investors to miss out on its best prospects. The good news is that ethical mutual fund distributors like InBest have worked hard to inform investors about common mistakes in MF holdings and effective strategies to avoid them.

Mistake 1: Taking “Investment Objective” for Granted 

You need to have an answer to the question: "Why should I put my money in mutual funds? Most investors would respond, "To increase my money." 

Most of the time, people start investing because they think they should because their friends, family, colleagues, and contemporaries are doing it. This is, however, a befitting objective. Investment objectives for mutual funds must look like the following: 

• To take advantage of tax benefits 

• To buy a home, car or any similar asset 

• Child education

• Son/Daughter’s wedding 

• Retirement Plan

The objective is a definite way to pinpoint the amount of time and money you can spend. Based on your goals, you can choose mutual funds. Today, there are many options available for both short and long-term investors. It does not work like magic or gambling. Even if you are spending your money just to see how it works, you must be conscious about choosing the right schemes. 

Mistake 2: Not Understanding How to Research the Best  Mutual Funds to Invest In

You will hear everyone say how you need to “research” the best mutual funds to invest in, but do you know what to research? Below are some of the key points to consider: 

• What are the expense ratio and transactions costs of the fund

• The track record of the fund manager 

• Establish your investment strategy and objective.

• Determine how the fund profile matches your investment objective

• How has the fund's past performance been, in particular, how has it fared for investors like you?

• Examine the fund's size and liquidity to ascertain how it can allocate capital and handle redemptions from investors. 

• Consider your ability to bear the risk by looking at the risk profile of the fund, which includes volatility, historical drawdowns, and exposure to various asset classes. 

Keep in mind that randomly selecting the investment company is not enough. Smart investing necessitates continuous observation and evaluation. Setting an investment goal upfront can help you focus your attention on the appropriate kinds of schemes and methodologies.

Mistake 3: Not Paying Heed to Tax Implications 

Mutual fund investment profits are taxable as "capital gains". Even if long-term capital gains up to Rs 1 lakh are completely tax-free in India, reluctance to file for taxes may lead to reduced after-tax returns. It is a wise choice to speak with a tax advisor or financial planner to comprehend the tax repercussions and build a compliant investment portfolio. 

Mistake 4: Investing Without A Proper Fund 

Never invest all of your savings in mutual funds without a backup emergency fund in place. Why? because the market is volatile and the outcomes are not as planned as they are with fixed deposits. If you don't follow this plan, you can find yourself taking the money out of the scheme in case of an emergency and missing out on your deserving returns. The smartest way to do this is by starting your journey with saving plans, such as SIP, recurring funds, and simply opening an emergency savings account. Allow this amount to accumulate into a sizable corpus that you can use for emergencies. Start your investment journey only once you have achieved this goal. 

Conclusion

Rising digital permeation, easy availability of financial know-how, and the availability of banking apps and financial sites with diverse investment schemes all contribute to the rapid evolution of the Indian mutual fund sector today. These factors also encourage the movement of asset shares towards smaller cities and towns, attracting millions of investors. Today, if you are looking to join millions of investors pooling their money over a common cause, you are going to need hoards of research, judgement, a realistic risk appetite, and financial backup. If you take any of that for granted, then you are risking yourself a big mistake.