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Seven Mistakes To Avoid While Investing Online In Mutual Funds - Outside View by PersonalFN

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Seven Mistakes To Avoid While Investing Online In Mutual Funds
May 22, 2019

The internet has brought the world to our fingertips. Everything we need ranging from education, food, clothes is accessible at the click of a button.

Similarly, investment options are also not devoid of an online presence. Introduction of online investment platforms has brought a great deal of convenience to investors. It is also a great resource for mutual fund houses to garner new customers, especially people from the younger generation who are tech-savvy and have recently started earning.

You can easily invest in mutual funds through websites, mobile app, and even SMS facility. It allows you to choose from the range of schemes the fund house has to offer and compare and choose the schemes. It comes with easy form-filling and payment/redemption options, all without paperwork. You can also get online assistance if you have any query. But as is the case with offline investments, online investments also require you to be careful.

[Read: How To Invest In Mutual Funds Online]

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Here are the seven mistakes you should avoid while investing in mutual funds online -

  1. Checking only recent returns

    Good performance in a shorter time frame such as 1-month return, 3-month return or 1-year return may impress you enough to invest in them. But to be able to get a better understanding of a scheme's performance, you should look at the rolling returns for 1-year 3-year and 5-year time frame.

    A mutual fund scheme may have earned attractive returns in the last 5 year, but the rolling return will allow you to check how consistent (or inconsistent) the returns in each of those years were. Remember to evaluate a mutual fund scheme based on its long-term returns and other performance parameters (quantitative as well as qualitative).

  2. Not doing proper research

    Before investing you should carefully go through the product details to get a better understanding of the product.

    Various documents like scheme information document and key information documents give details about the investment objective of the scheme, how will it allocate the net asset, where will your hard-earned money be invested, the investment strategy of the scheme, who will manage the scheme, the risk involved, who should buy the scheme and so on. Reading these documents will enable you to make informed financial decisions.

    Besides, if it is an existing mutual fund scheme, also read the factsheet to assess how the scheme fared.

    [Read: What to evaluate in a mutual fund factsheet?]

  3. Not seeking the help of an adviser

    There are thousands of schemes you can choose from and it can become a difficult task to select the right scheme. An investment adviser who is unbiased and independent can guide and handhold you to design a worthy mutual fund portfolio by recognising your risk profile, investment objective, financial health, goals and the investment time horizon.

    For selecting the appropriate schemes, studying quantitative and qualitative parameters is also important. An investment/mutual fund adviser with research capabilities will help you add the best schemes to your mutual fund portfolio.

    [Read: Why Selection Is Crucial To Make Solid Gains With Mutual Funds]

  4. Improper asset allocation

    Your investments should be well-diversified across asset classes ---equity, debt & money market, and gold. And this should be based on the asset allocation best suited for you.

    Asset allocation is a strategy in itself that facilitates portfolio diversification and reduces the overall risk.

    Every investor has different asset preferences based on the risk-return expectation. Also, in case one class of asset underperforms, the other asset class will serve as a cushion to the portfolio.

    Hence, when you invest in mutual fund schemes don't forget to ignore your personalised asset allocation.

  5. Trying to time the market

    The capital markets are prone to volatility; and so, trying to time the market may prove to be a futile exercise and be hazardous to your wealth and health.

    Rather than timing the market what is more meaningful is "time in the market". Do note that a trader is only good until his last trade. If you sell your investments when the markets are high, you may lose out on further gains as the markets may rise higher. Likewise, you may miss a good investment opportunity if you keep waiting for the prices to hit bottom.

    Therefore, to handle the volatility, Systematic Investment Plan (SIP), a mode of investing in mutual funds, which inculcates the habit of saving and investing regularly, and offers the rupee-cost averaging feature ---that helps in mitigating the volatility ---would be an appropriate path in the journey of wealth creation and accomplishing long-term financial goals.

    [Read: Best SIPs To Invest in 2019]

  6. Not checking tax implication

    Different tax rates apply to equity and debt funds. The applicable tax will also depend on whether you hold the investment for short-term or long-term.

    Taxes may reduce the overall returns you get on your investments. Therefore, make sure to factor in the tax implication on different types of schemes.

    Some schemes like Equity Linked Saving Scheme (ELSS)--also known as tax saving mutual funds -- allow you to save tax on investments; however, it comes with a lock-in period of 3 years.

  7. Focusing on only one fund house

    When browsing the website of a fund house, you may be tempted to select many schemes belonging to the samefund house. But this concentration can expose you to risk as diversification has to be not just across schemes but also acrossfund houses.

    [Read: Why Over Exposure To Popular Fund Houses May Be Hazardous To Your Portfolio]

    A particular scheme of a mutual fund house may be performing well, but it may not be true for the other schemes of the fund house. It will also be wrong to focus only on big and popular fund houses as some small fund houses may hold big potential.

To conclude...

Online platforms are an easy and convenient way for investment needs. But one should select the right mutual fund schemes after going through proper research, reading scheme related documents, and assessing your own investment needs.

Seek the help of an investment adviser if do you do not have enough time and knowledge to create an ideal portfolio. Review your investments periodically to track its performance.

You should also be wary of online frauds and refrain from sharing crucial information that may put your finances at risk and cause you loss. Choose only the official websites for transaction purposes.

Editor's Note: Do you wish to select the right mutual fund schemes for your investment portfolio to make your dreams come true?

I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Our fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

With FundSelect, you get access to high quality and reliable funds picked by our research team using our Special S.M.A.R.T Strategy to Discover Hidden Gems.

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

Our aim is to assist you in creating the ultimate portfolio that has the potential to top the market. If you are serious about investing in a rewarding fund, subscribe to PersonalFN's flagship mutual fund research service FundSelect today!

Happy Investing!

Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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