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Mistakes to avoid while selecting best mutual funds

Henil Shah
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Mistakes to avoid while selecting best mutual funds

A typical tendency of mutual fund investors is that they always dream of investing in the best mutual fund. However, doing so is not an easy task. This is not a one-time task; meaning, you cannot invest in a single fund forever. Hence, you need to evaluate and review your mutual fund portfolio at least annually. In this article, we have listed down a few mistakes that you should avoid while selecting the best mutual funds for your portfolio.

 

New fund offer

A new fund offer or NFO is like an initial public offering (IPO) in mutual funds. Though, both are quite different from each other as the IPO is done by the company to raise money from the public to fund its activities. Whereas, NFO is done to pool the money from investors with similar investment objectives. While dealing with NFO, you don’t have much information about the fund. While, in case of IPO, you have a lot of information available with you to take investment decision objectively. Hence, it is better to avoid NFOs that have nothing new to offer as it will further diversify your investment portfolio.

 

Blindly following star ratings

Mutual fund investors have a wrong perception regarding star ratings. They usually believe in 'the higher the star rating, the better the fund'. However, this has been proven in various studies that these star ratings are just based on their past performances and have nothing to do with its future performance as in, there’s no guarantee that it will perform well in the future as well. Hence, don’t make a mistake of judging a fund, simply based on its star rating.

 

Holding too many funds

Usually, people hold too many funds and that too of the same category with a belief that they are diversifying the investments. Frankly speaking, an average individual needs not more than 8 to 10 funds in his portfolio. Neither you need more than two funds per category to diversify across asset management companies (AMC) nor is there any need for you to invest in every category available. Beyond a limit, you don’t get the benefit of diversification. Further, it would increase the chaos and may also become unmanageable. Hence, it is always better to follow your financial goals. This way, it becomes easy to manage your mutual fund investments.

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