Mutual funds offer a straightforward path to wealth creation and goal fulfilment. But not all mutual fund schemes are well-suited for every investor. Often, investors pick the wrong mutual fund scheme which ends up compromising their wealth creation capabilities. To avoid the disappointment of lower-than-expected returns and high risk exposures, it’s best to understand the reasons why investors pick the wrong mutual fund scheme. This article offers a guide on the same in the hopes of helping you avoid these pitfalls and make informed choices.

Here are 6 reasons why investors pick the wrong mutual fund scheme:

Lack of clear investment goals

The allure of higher returns often makes novice investors start investing in mutual funds without a clear investment plan and goals. Jumping into MF investments without financial goals can be detrimental. Without clear goals, you might end-up selecting the wrong funds that don’t align with your requirements. Let’s say, the possibility of high returns draws you to small-cap equity mutual fund schemes. You invest a significant portion of your corpus into small-cap schemes, losing a considerable amount in the first year due to their intensely volatile nature. If you had originally planned to use the investment to build a down payment corpus for your home, this loss can set you back significantly. Understanding your investment goals and time horizon helps you pick MF schemes that best align with them.

Investing without understanding the scheme

A lack of thorough understanding can result in investors picking the wrong mutual fund schemes. Understanding the different types of mutual funds, what they offer, and their suitability is crucial in making informed investment decisions. For instance, most investors fail to realise that equity funds are best-suited for the long-term. Short-term market fluctuations tend to even out over the long-term duration, ensuring good returns from equity investments. Despite this, investors often invest in equity MF schemes hoping for easy gains in the short-term.

Improper understanding of your risk profile

Many investors fail to thoroughly understand their risk profile. They presume that a higher risk tolerance capacity makes equity mutual fund schemes the ideal investment options. While you may have a high risk tolerance capacity to withstand market fluctuations, you also have to consider the fact that risk levels vary among different types of equity MF schemes. For instance, you may be a conservative equity mutual fund investor who can shoulder relatively higher risks for high returns. In this case, a large-cap fund may be a better choice than a small-cap or sectoral equity fund. Choosing a mutual fund scheme simply on the basis of your overall risk profile can lead to wrong choices and result in losses.

Chasing high returns

Often, investors pick the wrong mutual fund scheme because they are too busy chasing high returns. They fail to consider how the return potential of a mutual fund scheme will align with their broader investment strategy and goals. Instead, they prioritise high yields and invest in small-cap and sectoral equity schemes that promise quick or high returns. This approach is inherently risky since it means taking on more risk than necessary.

Following trends blindly

Getting influenced by the latest trends and chasing after popular sectors can push investors to pick the wrong mutual fund scheme. In such cases, they are more focused on joining the herd and following the buzz in the market resulting in poor fund selection. In simple words, when you fail to exercise individual judgement, you run the risk of picking the wrong mutual fund scheme.

Not conducting enough research

Mutual fund schemes have specific investment objectives and styles that are clearly outlined in the fund offering document. As an investor, you should carefully review this document to understand if the fund’s objective and investment style coincides with yours. You may end-up picking the wrong mutual fund scheme if you base your choice on superficial information rather than these core fundamentals.

• Lack of a financial plan and clear product understanding can result in poor mutual fund scheme selection.
• Investors often choose the wrong schemes by chasing high returns without considering their risk profile.
• Blindly following the herd without thorough research can result in losses.

Lack of clear financial goals , inadequate research, improper risk assessment, and following trends blindly can cause investors to pick the wrong mutual fund schemes. Chasing high returns without factoring in volatility and risk can often result in losses. As an investor, remaining aware of these mistakes helps you avoid the pitfalls of wrong scheme selection and losses.

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