Do you spend hours looking up the best mutual funds? What returns have you got in the last few years? Are those higher than that of a bank fixed deposit?
For many who have invested in the last 5 years, their returns are lower than that of a bank FD. That’s disappointing when you think about the risk that comes with investing in the stock market.
Yes, the market has fallen due to the recent pandemic. But even pre Covid-19, the returns are not all that great.
“Mutual Funds Sahi Hai”?
Mutual Funds can be a great investment option if done right. But all funds are not the same.
Investing in a random selection of funds will not give you above-average returns. Even if you do get the fund selection right, there are some common mistakes to avoid.
5 reasons your mutual funds aren’t making you a lot of money:
1) Looking for the Best Mutual Fund
Searching for the best performing mutual fund is not always a great idea. A fund that has performed well in the last 3 years may not do well in the future. What’s more important is picking a fund that fits with your goal and risk appetite.
Work with a financial advisor to determine a goal.
2) Not Investing regularly-Trying to time investments
“Irrespective of good or bad times, invest in SIPs”
Don’t stop your investments when the market is low or vice versa. Over time, consistency beats timing. By investing regularly over a period of 10 years or more, you take out the scope for low returns from some funds.
3) Paying distributor fees
It is a good idea to consult with a financial advisor or planner if you are new to investing in mutual funds. But you are better off paying your advisor a one-time fee and investing in a mutual fund through a direct plan.
If you invest via your advisor, he/she will earn a commission from the fund each year. This commission gets deducted from your fund value.
You can buy direct mutual funds via apps like PayTM, ET Money, Zerodha etc.
4) Investing only in India focused mutual funds
Funds that only invest in Indian stocks risk being too reliant on the Indian economy. This risk can be lowered by adding some funds that invest in international stock markets like the U.S.
For eg. If India is facing a recession, but the U.S. has a period of high growth, it balances out. A mix of funds investing in India & the U.S. will be better off than funds investing only in India.
5) Not looking at mutual fund charges
Mutual funds charge an expense ratio for managing the fund. While there is an upper limit, the charges can vary between 0.5-2%. An index fund or ETFs which track market indices such as the Nifty have the lowest cost.
Compare expense ratios before investing and try to choose funds with a lower expense ratio.
Value Research is a useful tool to find and compare expense ratios.
Mutual funds can be powerful tools of saving and investment if done right. Avoid these pitfalls so you can get the most out of them.