Mutual fund investments are no more just a thing for old and seasoned investors. These days, a lot of young investors are considering these market linked schemes as well. The reason behind this is that they can invest small sums regularly in any mutual fund scheme via a Systematic Investment Plan. A lot of investors are becoming aware of the dynamics of SIP investments. The fact that SIP investments are able to create a commendable corpus in the long run only speaks volumes of the fact that it has become a favorite investment tool among the larger audience. However, new investors often end up making some rookie mistakes before starting their SIP mutual fund investments.
If you too are planning on making your first every SIP mutual fund investment, these are the common mistakes that you should avoid:
Investing in a low NAV mutual fund scheme
For some reason, a lot of investors believe that if they invest in a mutual fund that has a low NAV (Net Asset Value), they may be able to generate higher returns in the long run. However, how a mutual fund scheme performs has got nothing to do with its NAV. In fact, the only thing that matters is that fund management that is handling the mutual fund as it is their expertise that allows a fund to either perform or underperform.
Investing based on past performance
Several young investors choose to start a SIP in a mutual fund scheme based on how the fund has given returns in the past. Although it is a good idea to consider a fund with a proven track record, investors must understand that the past performance of a mutual fund scheme may or may not always determine its current or future performance.
Opting for growth plan over dividend plan
Rookie investors feel that they can earn regular returns by opting for a dividend plan but they are missing out on creating long term wealth. They do not realize that the dividends which the fund house offers are taken from the fund’s AUM (Asset Under Management) and in the long run, it can lower a mutual fund’s Net Asset Value. On the other hand, in the growth plan, the interest earned by the mutual fund scheme is reinvested back in the fund. This will not only lead to a rise in the mutual fund’s NAV but will also compound the investor’s sum and allow them to earn better returns in the long haul.
Stopping SIPs midway when the markets are bearish
Several mutual fund investors commence their SIP journey with enthusiasm but are often seen backing out midway. They fear that since the markets have turned bearish, their portfolio will underperform, and they may face losses. However, investors must see this as an investment opportunity, and instead of stopping their SIP investments, top-up their monthly SIP sum. When the markets are underperforming, most mutual fund NAVs drop and investors can buy more units at this point in time. When the markets gain momentum, the dropped NAV value will correct itself and so will the value of the once undervalued units. This concept of buying more units when the NAV is low and fewer units when the NAV is high is referred to as rupee cost averaging and can help an individual buy more units in the long run.
Before starting a SIP in a mutual fund scheme, investors can compare their performance to their peers and consider a fund with a low expense ratio.