Investing in mutual funds has become incredibly convenient, with digital platforms offering seamless processes. As of 2023, the Indian mutual fund industry manages over ₹67 trillion in assets, with a significant portion flowing through online platforms. This accessibility, however, doesn’t diminish the need for thorough research.
Whether you are a beginner or an experienced investor managing a diverse portfolio, avoiding common mistakes when you buy mutual funds online is crucial to making informed financial decisions. Here are five key mistakes you must avoid when buying mutual funds online in India.
1. Ignoring your investment goals and risk appetite
One of the most common mistakes investors make is investing in mutual funds without aligning them with their financial goals. Every mutual fund serves a different purpose, some are designed for long-term wealth creation, while others focus on short-term gains. If you do not define your goals clearly, you may end up with a portfolio that does not suit your needs.
Additionally, risk appetite plays a crucial role in choosing the right fund. If you have a low tolerance for market volatility, investing in aggressive equity funds might not be suitable. Instead, hybrid mutual funds, which balance equity and debt, can offer a more stable investment option.
2. Choosing funds based on past performance alone
It is natural to be drawn towards funds that have shown impressive returns in the past. However, this does not guarantee future performance. Market conditions change, and funds that have performed well previously may not continue to do so.
A smarter approach is to analyse multiple factors, such as:
a. Expense ratio: A lower expense ratio is crucial, especially for long-term investments, as it minimises costs and maximises returns.
b. Fund manager’s track record: Evaluating the fund manager’s experience, performance history, and investment style provides insights into their capabilities.
c. Portfolio diversification (within the fund):Examining the fund’s holdings and diversification across sectors and asset classes ensures appropriate risk management.
d. Investment strategy: Understanding the fund’s investment philosophy, asset allocation approach, and specific investment criteria allows for alignment with your own goals and risk tolerance.
By considering these elements, you ensure that you are making a well-informed decision rather than simply chasing past winners.
3. Overlooking costs and charges
When you purchase mutual funds online, it is easy to focus on returns and ignore associated costs. The expense ratio, exit load, and other charges can significantly impact your overall returns. The expense ratio represents the annual fee a fund charges to manage your investment. A high expense ratio can erode your gains over time.
The mutual fund’s expense ratio, which covers management fees and operational expenses, directly impacts your net returns. In India, SEBI has set the maximum Total Expense Ratio (TER) for equity funds at 2.25% and for debt funds at 2.00% for the first ₹500 crores of assets under management.
Over time, even a 1% difference can significantly affect your investment corpus. Additionally, be mindful of exit loads, fees charged when you redeem units within a specific period. These charges can erode your gains if not considered beforehand.
4. Inadequate portfolio diversification
Diversification is key to minimising risk and ensuring steady returns. Many investors either concentrate too much on a single type of fund or over-diversify by investing in too many funds, which reduces potential gains.
A well-balanced portfolio includes:
a) Equity funds Focus on long-term growth by investing primarily in stocks. They are ideal for investors with a high risk tolerance and longer investment horizons.
b) Debt funds: Provide stability and regular income through investments in fixed-income securities like bonds. They offer a buffer against market volatility and are suitable for risk-averse investors.
c) Hybrid mutual funds Offer a mix of growth and security by investing in both equity and debt instruments. They appeal to investors looking out for a balance between potential returns and risk mitigation.
A balanced approach helps spread risk while ensuring that your investments align with your goals.
5. Ignoring tax implications
Understanding the tax treatment of your investments is vital to avoid unexpected liabilities. In India, equity mutual funds held for over one year qualify as long-term capital gains (LTCG) and are taxed at 12.5% for gains exceeding ₹1.25 lakh.
On the other hand, debt mutual funds are now taxed as per the investor’s applicable income tax slab rates, with no indexation benefits, for investments made after April 1, 2023. Hybrid mutual funds‘ taxation depends on their equity exposure; if it exceeds 65%, they’re taxed as equity funds; otherwise, as debt funds. Being aware of these nuances can aid in effective tax planning.
When you buy mutual funds online, avoiding these common mistakes can enhance your investment experience and potential returns. By setting clear goals, evaluating funds beyond past performance, considering associated costs, diversifying appropriately, and understanding tax implications, you position yourself for informed and strategic investing. For a seamless investment journey and expert guidance, consider platforms like Ventura Securities.
