New Delhi (India), March 23: Investing in equity mutual funds is a great way to grow your wealth over time. However, investors in India often make certain mistakes while selecting these funds, which can make the wealth creation ride a bumpy one. 

In this article, we discuss the 5 common mistakes

Let’s discuss five common mistakes to avoid for a more successful investment journey in the equity mutual fund arena.

1. Chasing Past Performance

One of the most common mistakes is selecting funds based solely on past performance. A fund that has performed well in the past may not necessarily do so in the future.

Market conditions, fund management changes, and a host of other factors can impact future performance. 

Investors should look at consistent performance over longer periods and also consider other factors like fund management quality, expense ratios, and investment style.

This can be done by considering rolling returns of funds over long periods instead of looking at point-to-point returns.

2. Ignoring Risk Tolerance

Equity mutual funds come with varying degrees of risk. It’s crucial to choose funds that align with your risk tolerance. 

Often, investors get swayed by high returns and choose funds (like small cap funds!) that are too risky for their comfort level. This can lead to panic selling during market downturns, which is detrimental to long-term investment goals. 

Assess your risk appetite and select funds that match your ability to absorb losses during market fluctuations.

Large cap funds are considered to be the most stable among equity funds while small cap and thematic funds are generally the most volatile.

3. Overlooking Diversification

Diversification is key in managing risk, yet many investors fail to diversify their equity mutual fund investments adequately. 

Investing in funds that focus on only one sector or market cap (like only large-cap or small-cap) can expose you to higher risk. 

It is also important to not over-diversify your mutual fund portfolio. Over-diversification is also detrimental (maybe not as much as under-diversification) to portfolio performance.

4. Falling for the NFO (New Fund Offer) Trap

New Fund Offers may seem attractive, but they don’t have are essentially funds with no track records. 

Many investors fall for the marketing hype surrounding NFOs without understanding the fund’s strategy or the manager’s expertise.

Investing in funds with an established history is more reliable than investing in NFOs. This is because history can give us some sense about the consistency of performance and helps us evaluate the management style of the fund.

5. Neglecting Fund Expenses and Fees

Fund expenses and fees can eat into your returns significantly over time. 

High expense ratios can diminish the effective return from a fund, especially in a market delivering moderate returns.

It’s important to compare the expense ratios and choose funds that offer a good balance between costs and performance potential.

However, expense ratio should not be a deal-breaker. If a fund has delivered consistent returns and is likely to continue doing that, a higher expense ratio is justified. 

It is better to pay and get that predictable performance instead of rejecting the fund just because the expense ratio is a bit higher.

Conclusion

Investing in equity mutual funds can be a fruitful endeavor if done right. Avoiding these common mistakes can help investors in India make more informed and efficient investment decisions. 

Remember, thorough research, understanding your own investment profile, and not getting swayed by short-term trends are key to successful equity fund investing. 

As always, consulting with a financial advisor for personalized advice can be a prudent step in your investment journey.

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