Beyond the Shine: Avoiding the Most Common Mutual Fund Mistakes

When most of you step into the world of mutual fund investing, you are tempted by the glitter of recent returns. It’s a familiar story: the top-performing fund catches the eye, and you rush in hoping for a repeat. But history rarely repeats so neatly—especially when that stellar performance was powered by one-off events or high-risk bets.[EasyDNNnews:PaidContentStart]

Equally problematic is choosing the wrong type of fund for the wrong goal—such as using a liquid fund for a long-term objective or an equity fund for a short-term need—resulting in poor outcomes. First-time investors are particularly prone to getting lured by sectoral or thematic funds flaunting flashy short-term gains, without fully understanding the underlying risks. A recent example is the sharp 33 per cent drop in defence sector funds during the second half of 2024, compared to just a 4.5 per cent drawdown in the Nifty, underscoring the danger of chasing trends.

Another overlooked factor is the market cycle. Evaluating a fund purely on its bull market performance is misleading; a fund that hasn’t proven its strength across both bullish and bearish phases hasn’t been truly tested. A strong fund should not only outperform its benchmark but also show consistent performance against its peers and demonstrate resilience across varied market conditions. Unfortunately, most investors also ignore risk-adjusted performance. Metrics like the Sharpe ratio, Sortino ratio, and Alpha are critical in evaluating whether the returns justify the risks taken, yet they often get sidelined due to their complexity.

A practical workaround is to rely on risk-adjusted fund ratings from credible sources that distil this complexity into friendly scores for you. Ultimately, the goal should not be to find the ‘best’ fund at any given time, but to stay invested in a set of suitable, well-diversified, and reasonably performing funds that align with long-term goals.

Regular portfolio reviews, a focus on suitability over popularity, and tuning out the noise from frequent NFOs and trendy themes are far more effective strategies for wealth creation in the long run.

Shashikant Singh
Executive Editor

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