What to avoid when investing in mutual funds
Mutual funds are a popular investment vehicle for investors due to the variety of products based on a range of investment requirements. However, before you invest in a mutual fund, here are six mistakes investors tend to make that you may want to take note of.
1. Treating Mutual Funds Like Stocks
Many beginner investors tend to get attracted to high-short-term returns that they end up seeing mutual funds the same way as individual stocks. Such perception also makes them forget or unaware of the fact that a mutual fund is a collection of stocks created after meticulous research performed by professional fund managers.
Fund managers are tasked to pick value stocks correctly according to the portfolio's goal. Therefore, buying and selling mutual funds for trading reasons would be a mistake. Keep in mind that mutual funds can't generate the same amount of profit as individual stocks, nor would they ever have the same level of potential losses.
2. Sure Profit
Investing in a mutual fund doesn't always mean a sure profit, as every mutual fund is subject to market risks. That means the amount of money you make from a mutual fund will vary, depending on the volatility in the market.
3. Relying on Past Performance Alone
A mutual fund's past performance can provide an idea of how good the fund manager was in selecting the right stocks at the right time. However, that doesn't guarantee that the fund will make the same performance in the future. Instead of analyzing only past performances, investors need to examine every part of mutual funds.
4. Thinking a Lower Net Asset Value (NAV) Means Better
Every investor knows that buying low and selling high is the way to earn a good profit, and this is what they try to do with every investment. Many investors invest in new fund offers (NFOs), hoping that they can invest at its base price. However, even for an NFO, the price at which it purchases its primary assets is the same for every other market player.
The NAV at which you can buy the mutual fund units is not crucial. What you need to consider is the price that the fund manager purchases the underlying securities. Avoid investing in mutual funds just because the NAV is low. Note that the NAV increases as the fund gets older.
5. Comparing Mutual Funds
Many investors tend to compare mutual funds based on the amount of returns each has generated. They forget to consider other aspects of the funds or whether they are in the same category. Comparing mutual funds should be done with the right people and the right standard.
You can't compare performances between a small-cap fund and a large-cap fund because they invest in different groups of stocks. Small-cap funds should be compared with funds in the small-cap category, and the same goes for large-cap funds.
6. Going for the Dividend Option
The dividend option is a popular choice for investors, particularly retired investors, seeking a regular income. However, the dividend provided by mutual funds is relatively different from dividend-paying stocks.
With stocks, the
dividends are declared from the profits, which came from selling a company's
products or services. With mutual funds, the profits stem from the sale of
assets and appreciation of the assets held.
