A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Mistakes you make when investing in mutual funds
Making a mistake while investing happens in all investments, and mutual funds are no different.
Some of the common mistakes when investing in mutual funds are:
- Investing without understanding the product: For example, equity funds are meant for the long term, but investors are looking for easy short-term returns.
- Investing without knowing the risk factors: All mutual fund schemes have certain risk factors. Investors need to understand this before making an investment.
- Don’t invest the right amount: Sometimes people invest randomly, often without a goal or plan. In such cases, the amount invested may not produce the desired result.
- Redeem too early: Investors sometimes lose patience or don’t give the time it takes for an investment to provide the desired rate of return, and then redeem prematurely.
- “Join the herd: Very often, investors do not exercise individual judgment and get carried away by the buzz of the “market” or the “media”, and therefore make the wrong choice.”
- Investing without a plan: this is perhaps the biggest mistake. Every single rupee invested must have a plan or goal.