Mistakes to Avoid While Investing in Mutual Funds

You see a fund that delivered 40% returns last year and feel tempted to invest. This is called chasing past returns, choosing funds based only on recent performance. It’s a common mistake and often doesn’t work out.

Why it happens: Past performances are visible. Future performance isn't. So, we assume what worked recently will keep working.

Why it fails: A fund that rallied 40% might have been riding a sectoral boom. That boom might be over. Or the fund took concentrated bets that paid off once but won't repeat.

SEBI mandates the disclaimer "past performance is not indicative of future returns" for a reason. It's not legal jargon. It's a warning.

What to do instead: Look at performance across 3-5 years, rolling returns and multiple market cycles. Has the fund been consistent? Has it managed downside during corrections? That tells you more than one stellar year.

You need money in 2 years for a down payment. You invest in an equity fund because "equity gives better returns."

This is wrong fund selection mistakes at its core - mismatching investment type to goal timeline.

Why it happens: Equity funds have historically grown more than debt funds over long periods. So, people assume equity is always better.

Why it fails: Equity funds can drop 20 to 30% in a year. If your goal is 2 years away and the market crashes in year one, you're forced to sell at a loss. No time to recover.

What to do instead: Match timeline to fund type:

• Under 1 year: Liquid, ultra-short or low duration debt funds

• 1 to 3 years: Short term debt fund or conservative hybrid

• 3 to 7 years: Hybrid funds

• 7+ years: Equity funds

This isn't about "best returns." It's about not needing to exit at the worst possible time.

When markets fall and your portfolio shows losses, it’s natural to feel anxious. However, stopping SIPs or selling investments during market downturns often leads to permanent losses.

Why it happens: Loss aversion is hardwired. Watching your money shrink feels unbearable.

Why it fails: Markets recover. They always have. Selling during a crash means you miss the recovery. The money you "protected" is now stuck in a savings account earning 3%, while the market rallies.

What to do instead: If your goal is 7 to 10 years away and the market drops, that's not a crisis - that's temporary volatility. Keep investing.

You buy 10 mutual funds thinking more funds = more safety.

This lack of diversification in mutual funds might sound backward, but it's real - holding too many funds creates overlapping portfolios and dilutes focus.

Why it happens: More feels safer. Each new fund feels like added protection.

Why it fails: Most large-cap equity funds hold similar top stocks. If you own three large-cap funds, you're not diversified.

What to do instead: 3 to 5 well-chosen funds are enough for most investors. One equity fund, one debt fund, maybe a hybrid - that's a solid core. Beyond that, you're adding complexity without meaningful benefit.

Many investors realise the impact of taxes only after they exit an investment.

Why it happens: Tax rules feel like fine print. Nobody reads the fine print until it's too late.

Why it matters:

• Equity funds: Gains on units held for less than 12 months are taxed as short-term capital gains. Units held for more than 12 months are treated as long-term capital gains.

• Debt funds: Gains are taxed at your income slab rate, regardless of holding period.

• Exit loads: Some funds charge a fee if you redeem within a year.

Selling at the wrong time can cost you more.

What to do instead: Know the tax treatment before you invest. Plan redemptions around the 12-month mark if you're in equity funds. Factor in exit loads when deciding how long to stay invested.

The mistakes to avoid in mutual fund investing boil down to three things.

Match timeline to fund type: Equity for 7+ years. Debt for under 3 years. Hybrid in between. Don't invest in equity if you need the money next year.

Build review discipline: Check your portfolio quarterly or half-yearly. Are your funds still aligned with your goals? Has the fund strategy changed? Has the manager left?

But don't check daily. Daily NAV swings are noise. They'll only trigger panic.