This article delves into the common mistakes people make when investing in mutual funds and provides valuable insights on how to steer clear of them. Avoiding these inadvertent errors is crucial, as they can significantly impact your returns.

So, let’s begin.

1. Chasing Performance

Chasing performance is a mistake most of us have made. After all, it’s really tempting to see a fund give high double-digit returns and invest in it, hoping that its dream run will continue and one will earn those returns.

Unfortunately, in most cases, it doesn’t happen. That’s because top performers change every year.

Take a look at the table below. It shows the top equity funds of the last 10 years.

As you can see, all sorts of funds have been top performers in the last 10 years.

There are sectoral funds, thematic funds, small-cap funds, international funds and what not.

Now, if you were going to chase performance, you would invest in the year’s top performers, which means a lot of churn in your portfolio.

But is this churning worth it? Let’s look at the numbers

Let’s say, at the start of 2014, you invested Rs 1 lakh each in the top performers of 2013.

On January 1, 2015, you redeemed this money and invested it in the top performers of 2014.

So, every year, you kept investing in the top performer of the previous year by redeeming money from the existing funds at that point in time. You kept doing so until 2023.

How would your returns compare with someone who invested Rs 3 lakh in the Nifty 50 and Nifty 500 at the start of 2014?

See the chart below. (For simplicity, we have considered pre-tax returns)

2. Investing In Sectoral/thematic Funds

From time to time, different sectors and themes do well in the market.

Many investors are attracted to sectoral and thematic funds due to their short-term returns.

However, investing in these funds is riskier than investing in diversified equity funds.

A major challenge of investing in sectoral and thematic funds is guessing which theme will work.

Not many investors can boast of getting that correct. What adds to this problem is that the top sectors or themes keep changing.

If you refer to the table below, it shows the top-performing sectors over the last 10 years.

3. Investing heavily in mid- and small-cap funds

Like sectoral and thematic funds, mid- and small-cap funds attract a lot of attention.

In bull runs, these funds tend to give amazing returns, and many investors find that too difficult to ignore.

So, it’s obvious that people would want to invest in mid-cap and small-cap funds.

But these funds are not meant for everyone.

Only if you are willing to take higher risk for better returns should you invest in mid- and small-cap funds.

If you are someone who doesn’t like too many ups and downs in your portfolio, you can very well remain with diversified equity funds.

4. Not reviewing your portfolio

Yet another common mistake that investors make is that they don’t review their portfolio periodically.

This is essential. It helps you to cut down on risks and problems. And this can help you boost your returns.

Let me give you one example from my portfolio. In 2014, I started investing in a tax saving fund. (Aditya Birla SL ELSS Tax Relief 96) It was doing quite well at that time. For three years, the fund outperformed NIFTY 50 and NIFTY 500.

But from 2018 onwards, it started slipping. It has underperformed the benchmark since then. I waited for four years of continuous underperformance to stop my SIPs. So, finally, I stopped investing in it in 2022. I will be able to withdraw from it entirely by 2025. Until then, I am stuck with it.