Investing in Mutual Funds or Stocks is not nearly as difficult as it looks. However, it is successful investing that involves doing a few things right and avoiding serious mistakes. Yes, there are some common mistakes which people tend to repeat while investing in Mutual Funds and Stocks as well. So in this blog we focus on mistakes that do not let you become rich by investing in Mutual Funds.
If you focus on the right investment strategy, preferably given to you by your investment adviser while consciously avoiding these mistakes, there are high chances that you should reap rich benefits of your long term investments.
Also please see: Reasons Why You Are Not Rich Yet
Mistakes That Do Not Let You Become Rich By Investing In Mutual Funds
1. Doing Lump sum Investment when the markets are high
It is very difficult to time the stock market for a retail investor who is a common man. If someone were to invest when the stock market is at peak or is near that, then the purchase price of the units will also be high. Thus the investor may have to wait for a long period of time for his investments to appreciate considerably. In fact, he may soon see the bearish trend – if the cycle were already high.
Recommendation: It is a considerably safe bet to invest through the SIP route so that there is Rupee Cost Averaging. Additionally this also gives relief from the volatility of the Stock Market.
2. Keeping the initial amount of SIP low
Most of us are familiar with the concept of “power of compounding”, but we tend to overlook the need for keeping the amount of investment higher during the initial period.
Let us understand this with the help of an example. Suppose, someone decides to invest Rs.1500/- per month via SIP (Systematic Investment Plan) in a good equity Mutual Fund for a period of 25 years. Then his total investment would be Rs.4.5 lakhs. Assuming that the mutual Fund he has invested in gives an annual return of 15%, then his corpus at the end of the period would be Rs. 49.30 Lakhs approximately. Assuming that the inflation rate is 6% per annum, then the expected amount after the journey of 25 years is likely to be Rs. 16.9 lakhs.
However if he were to save and invest a higher amount, say Rs.5000/- per month, then his corpus size after 25 years would be approximately Rs.1.64 crores and after adjusting the inflation, it should be Rs. 56.5 lakhs.
Better strategy: Make a small sacrifice today and retire a rich and wealthy person. Also please see: How To Retire Rich
3. Investing for shorter period
Successful investing in mutual funds and stock market requires a lot of patience. It is this virtue which many investors do not have in sufficient quantity.
The long term investment is usually of minimum 5 years. Any investment done for a period of 5 years is unlikely to give solid returns to the investor, unless he is lucky to have invested when the stock market was at its lowest or near those levels.
Recommendation: Invest for at least 5 years in a good stock or Mutual Fund. We should rather think in terms of 10 years, 15 years, 20 years and 25 years for good gains. Give time to your investments to grow to a reasonable level and size.
For example, if someone were to invest Rs.100,000 in the growth scheme of a Mutual Fund which is expected to give a return of 15% return p.a. then after 5 years his total amount is likely to double – around Rs.201,135. However, if he increases his period of investments, then he would reap much higher returns because the interest / dividend will be re-invested and it will grow to a sizable corpus.
The following table should make it very clear:
4. Frequently re- adjusting the investment portfolio
Due to the influence of one or more of the factors such as impatience, wrong advice, desire to beat the market etc., the investor frequently shifts from one stock / Mutual Fund to another. It is a proven fact that only a small percentage of mutual fund managers can beat the index of the stock market. Even if, they are able to do so, then they may not be able to repeat the phenomena of success over the long period of time.
Generally, the investors may not take very good decisions once they see the volatility of the market. Their emotions may effect right decision making process.
Better strategy: It is better to stay invested in a few select mutual funds chosen out of your own thorough study or as per the recommendation of a good investment adviser. This way you not only save yourself hassles of monitoring the investment too frequently but also save the commissions payable on sale / purchase of stock / Mutual Fund. Also please read: Five Steps to Investing in Stock Market
5. Not seeking professional advice
A lot of times, the new investors tend take uninformed decisions which could be based on impulse or a casual article in the newspaper / magazine or follow a friend’s advice. More often than not, this may not be the best wealth Management advice you can get.
Recommendation: It is always better to connect with a good investment adviser or a wealth manager and spell out your financial goals in future. A good wealth Management company has trained workforce to understand your needs and suggest best investment strategies based on your current unexpected levels of income. It is better to pay small amount as their advisory fees then to lose a much big amount of earnings.
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