The index has seen a rising trend in the past few weeks however it has been driven by a few stocks. While we do have a significant lot of new retail investors getting added in the past 14 months or so, we have simultaneously seen the markets being volatile at various point in time in the same period. Hence, understandably, there must be a lot of first time investors who are currently anxious as their expectations of returns when they would have started an SIP may not be matching with the current returns which they must be experiencing.
Here are a few mistakes which a lot of retail investors make while investing or staying invested in mutual funds, which if consciously avoided may ease out a lot of anxiety in them.
1. People do not identify the goals for a financial investment, hence, often they cannot make up their minds on what kind of returns should they expect from what period of time and from what nature of fund. For eg., saving for an international travel can be a financial goal for one year for which they may choose to invest in a debt oriented fund. However, a child’s education can be a 10 year financial goal for which one may choose a diversified equity fund. One must be always conscious of the fact that returns depend on the tenure of the investment and the asset allocation done basis their own risk profile. Hence it is best to identify the financial goals and have the investment horizon decided as the first step towards a prudent financial planning.
2. Planning for Tax is often done towards the end of the financial year and not throughout the year. An SIP in an Equity Linked Savings Scheme started at the beginning of the year may be a wiser investment than a lump sum investment at the end of the year. Often it is seen that people do not have enough of liquidity at the end of the year to do their tax saving investments. Hence, earmarking funds which gives one tax benefits right at the beginning of the year or at regular intervals during the year puts less last moment stress on their finances.
3. During extreme volatility or a phase of pessimism people tend to redeem or stop their SIPs. A lot of historical data validation is available today and we humbly urge all investors to go through that data before making any hasty decision. In the year 2000 February, the market corrected and within 3 months, the 65.3% return was down to 1.1%. When the market bottomed in October 2001, that return further went down to -25.4%. If this investor had not panicked and continued the SIP, after 5 years, the SIP return on the entire book was 17.1%. So one must not take a knee jerk decision of withdrawing in a volatile market if one’s investment tenure and investment goal as some more time in the offing.
4. Chasing returns: People tend to over review and over analyse the returns of different schemes and there is a trend of switching between scheme A to scheme B the moment one finds the returns of scheme B slightly better than the former. Like your investments must have a goal, every fund also has an objective and it is only fair to give the requisite time to a particular fund before jumping onto a decision of switching out of it.
5. Choosing a dividend plan not wise always - should be done only when there is a pertinent need for regular cash flow. If not one should always choose for a growth plan as that money continues to be a part of the fund which more often than not earns better returns than 4% in a savings account where the dividend otherwise would have got credited.
6. Planning for retirement: People tend to plan for their house, child’s education, car or travel; however, many overlook or postpone the need for planning for retirement. Planning for retirement through mutual funds should be kept in your financial planning radar, especially in a country like ours where robust pension schemes are yet to evolve.
In conclusion, creating the corpus which can be used after retirement is a long term investment horizon and what better way than mutual funds to help you achieve this goal.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.