Mistakes People Should Avoid While Investing In MF

Stock markets in India are trading near their life-time highs. There is a certain amount of euphoria and positivity in the markets right now. At the same time, the story on the ground is just the opposite. GDP growth is flailing and economic activity is currently lacklustre. At this juncture, the question on everyone’s mind is whether the markets will continue to show strength or will disappointing macro-economic activity lead to a market sell-off? While I have never been one for crystal ball gazing, I do believe that there are certain investing tenets that investors should be cognizant of, at any market level.

Know your risk profile: risk profiling assumes great importance in investment decision making. Along with a return objective, every investor has a certain ability and willingness to absorb risk. Given the current equity and fixed income scenario, risk profiling becomes more important. Asset allocation and subsequent investment decisions should ideally reflect an investors’ risk profile and return objective.

Don’t follow the herd: in investing, there is no “one size fits all” solution. Instead of following the herd and investing in everyone’s favourite fund, choose funds that are more suited to your risk/return objective and have the potential to meet your long-term goals.

Diversify: choose funds that have the ability to meet both your short-term as well as long-term goals. In addition to investing in pure equity or pure fixed income funds, consider dynamic asset allocation funds which are well positioned to capitalise upon opportunities in both equity and fixed income segments. However, also be cognisant of the risk of over-diversification. Optimal diversification is achieved not by simply spreading your investments across a number of funds but by investing in a set of diverse funds.

Creating an optimal portfolio that is capable of meeting your idiosyncratic risk/return requirements can be challenging in any market environment. However, this challenge is magnified in scenarios such as the present one. Be judicious, make holistic portfolio decisions and seek the advice of a professional financial advisor wherever required.