How Not to Choose a Mutual Fund?

Saving and investing for future is a vital part of everyone’s financial plan. Of late, mutual funds have emerged as one of the most preferred investment instruments among all types of investors. Not only it can help you gain decent returns but also you can diversify your portfolio by investing in a variety of funds as per your financial goals, risk appetite, and investment horizon.Having said that, you should keep in mind that the returns from mutual funds are never guaranteed. If you make a mistake in choosing the right mutual fund for your investment, you might end up with huge losses in future. Given below are few mistakes which you should avoid at all costs while choosing a mutual fund:

1. Never take a decision solely on the basis of past performance Many investors get lured by the impressive past performance of a mutual fund and take a decision to invest in it solemnly because of this factor. However, you should keep in mind that the past performance of a fund does not guarantee future returns. Several other factors including market scenario can affect the performance of a mutual fund. Therefore, opt for the fund with strong fundamentals rather than the one with superficial past performance.
2. Don’t select a mutual fund just because it’s rated highly This is another common mistake that a rookie investor can make. He/she can invest in a mutual fund just because it’s rated highly by the aggregators. You need to understand that these ratings are mainly because of recent, short-term performance of a mutual fund and it does not guarantee long-term returns. Hence, it’s wise to look at the factors like fund manager, AMC etc. rather than present rating of a mutual fund.
3. Don’t pick a mutual fund on the basis of hearsay You might have heard your friend or colleague speaking highly of a mutual fund and may want to invest in it. However, that’s not the right thing to do. You should not invest in a mutual fund just because it was recommended by someone close to you. Rather, you should do a proper research about the scheme and invest in it only if it’s aligning with your financial goals and risk appetite.
4. Don’t take the returns quoted by the AMC on its face value Many Asset Management Companies (AMCs) try to entice the investors by quoting very high returns provided by their funds in the past. However, this can be misleading. Factors such as expense ratio, entry load, exit load etc. may bring down the actual returns provided by these mutual funds to the investors. Hence, look at the actual returns provided by the funds rather than quoted returns.

Every investor has its own financial goals, investment strategy, and preferences. Therefore, you should always select a mutual fund on the basis of a thorough research and inclination with your requirements rather than a fleeting glance on its recent performance and market reputation.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.