With thousands of fund choices available in the market today, choosing any single fund or a combination of two or more funds for the purpose of building mutual fund portfolio can be challenging. Listed below are six such mistakes that one need to avoid when building mutual fund portfolio.
Reacting To Short-Term Returns –
Towards the end of the financial year or at the beginning of the New Year, investors tend to churn their mutual fund What they generally do is – sell the fund with the negative one year returns and buy the one with the latest best returns. Though it makes them feel better, what they won’t see is that they are selling low and buying high. It is better to buy or hold funds with lagging short-term returns / performance than those with top-quartile returns.
Accumulating Too Many Niche Funds –
Specialist funds, thematic funds or niche funds are exciting to buy, but they will damage your portfolio if you let them go. Thematic funds add extra volatility and make it difficult for you to manage your mutual funds portfolio. Be sure to diversify between market caps, equity and debt, and maybe even some amount of foreign exposure.
Making Things Complex –
The financial industry works day and night to sell the message that investing is complicated, messy stuff that you couldn’t possibly undertake on your own. Actually, buying and holding a portfolio composed of plain-vanilla funds (diversified fund) is more than adequate to reach your financial goals. That’s also the kind of portfolio that you can easily manage yourself.
Failing To Rebalance Portfolio –
When the markets really move, your portfolio can go off-kilter and mess up your nicely laid plan. Rebalance yearly so that you’ll be buying low and selling high.
Failing To Factor Taxes Into Portfolio Decisions –
Taxes play a vital role in your long-term success. But don’t buy ELSS (equity linked savings scheme) funds in a last minute to save taxes. Tax planning must be an integral part of your portfolio planning, so ensure that you sell your units in a way to minimize or avoid tax.
Worrying About Daily Ups And Downs –
Don’t get stressed tracking the market on the web or watching business TV channels. Those activities are informative and exciting but not always helpful if you are long-term investors. All those ups and downs in the markets have no bearing on your long-term financial goals. Warren Buffett, top investor on the earth, advocates buying stocks only you wouldn’t care if the stock market took a two-year holiday. The same applies to mutual funds as well. Buy them and tune out the noise.