Mistakes You Should Avoid when Investing in Mutual Fund 

 

Whether you’re still testing the waters of investing or you’re already planning for your retirement, there’s a huge chance that you will invest in mutual funds. Mutual funds let you gain exposure to different industries minus the burden of picking stocks individually. However, it is also very important for you to be aware of the common mistakes that you might commit when you start to invest in mutual funds. 

Paying a lot of Fees 

There are many different kinds of mutual funds and investors will have to pay different fees based on the fund that they choose. Actively managed funds or those that have a fund manager who picks stocks are usually charging more than passively managed funds like index funds.

However, that’s not the only difference when it comes to fees. There are mutual funds that pay brokers a commission for selling their product to investors. That commission is called a front-end load and it can be up to 5 percent of the invested asset. They charge it upfront. 

Meanwhile, a back-end load fee is that fee you pay when you sell the fund. A no-load fund has no commission related to the buying or selling of the fund. It’s usually a good choice for mutual fund investors who want to minimize the fees that they have to pay.

If you don’t pay attention to the fees that you pay, you could see your returns reduced even with a mutual fund. 

Trusting Past Performances Too Much 

Usually, investors go after the past performance with the hopes that history will repeat itself. However, past performance doesn’t always guarantee future performance.

Even if a fund did well one or even five years before, this doesn’t mean that it will continue doing that in the future. 

Most of the time, investors choose the fund because of its past performance without giving much thought to what the fund invests in or whether the exposure is in line with their risk tolerance and time horizon for investing.

Forgetting about Tax Implications 

Although many investors will use mutual funds with their company-sponsored retirement accounts, they will also invest in mutual funds other than retirement accounts, which could lead to taxations if they are not careful. 

These tax events happen because if an investor chooses an actively managed mutual fund that has a high turnover rate, the investor could be taxed for any gains. 

Commonly, the mutual funds with higher turnover rates are going to generate more tax events, which are important for investors to be aware of. 

Not Checking for Redundant Investments 

Do not every choose a mutual fund, invest in it, and then forget it without paying attention to the underlying investments found in the fund. 

If you own only one mutual fund, this may be acceptable. However, if you’re spreading your investments across different mutual funds to diversify then you ought to do some homework. 

After all, it’s not wise to hold the same investments in multiple mutual funds. The whole idea is to diversify in different asset classes and industries. If your mutual funds all hold the same stocks and bonds, then you’re not really diversified.

This may lead to huge losses when the market tanks since you have put yourself in a position for a bigger blow. 

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