Avoid irrational decisions while investing in MFs

Market-linked investment options like Mutual Funds are helping long-term investors stay ahead of inflation and achieve their varied investment goals. While it is heartening to see an increasing number of investors building their core portfolio with the help of mutual funds, there is still a large section of the investing public that either remains sceptical about the role mutual funds can play in their wealth building process or does not benefit from their true potential due to wrong investment strategies, haphazard decision making, and allowing some of the myths to cloud their investment decisions. [EasyDNNnews:PaidContentStart]

Investors must know that mutual funds allow them to practise asset allocation by investing in different asset classes like equity, debt, gold, silver, REITs, and InvITs through a variety of funds. T The fact that there are a variety of funds available for investing in these asset classes, wherein fund managers follow different investment philosophies and strategies, means there are opportunities for investors to build a well-balanced portfolio, as per their risk-taking ability. 

However, the key for investors to get the best from mutual funds is to have a better understanding of what they offer, as well as not allow myths to influence their investment decisions. Here are some of these myths and how investors can tackle them: 

Equity Funds are meant only for risk-takers
While equity funds tend to be volatile over the short and medium term, they have proved their ability to outperform other asset classes for investors willing to stay committed to a pre-defined time horizon and follow a disciplined investment approach. Considering that earning positive real returns, that is, gross returns minus inflation and Taxes, holds the key to building wealth over the longer term, it is essential for every investor to invest in equity funds, albeit with a clear understanding that they need to keep an eye on exposure level and stay committed to their defined time horizon. 

Investing in top-performing funds guarantees higher returns
The problem here is that if you chase short-term performance, you may end up investing a significant part of your investments into some of the aggressive categories of funds. Remember, equity as an asset class is aggressive by nature. Hence, investing in these aggressive categories such as sector, thematic, smart beta, as well as micro-cap funds, can make your portfolio even more risky. Therefore, the mainstay of your portfolio should be well-diversified categories of equity funds like flexi-cap, large & midcap, and multi-cap, with some exposure to mid and small cap funds. More importantly, look to invest in funds that have a consistent performance track record vis-à-vis their peer group and the respective benchmarks. 

Investing in a large number of funds can minimise risk
While diversification helps in mitigating the risk and volatility, investors need to realise that mutual funds themselves are a diversified investment option. Therefore, having too many funds may prove to be counter-productive, as it can create an overlap which may result in these funds behaving exactly in the same manner in different market situations. Needless to say, it defeats the purpose of diversification in the portfolio. A careful selection of a few funds can provide adequate diversification in the portfolio. 

Investing through SIP protects against negative returns
SIP has emerged to be a powerful strategy to invest in market linked funds, as it not only minimises the impact of volatility but also creates a large corpus through regular contributions over time. Besides, it brings the average cost down and helps in keeping emotions out of the investment process. However, it would be wrong to assume that if you invest through SIP, there will not be any negative or erratic returns in the portfolio. The fact is that SIP minimises losses in the short term and improves returns in the long term. Therefore, every investor who signs up for SIP must be prepared to tackle certain periods of uncertainty over the short or medium term and avoid making any abrupt decisions.

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