Common mistakes first-time equity fund investors make and how to avoid them

Equity funds may offer an accessible way to participate in the stock market without directly buying and managing individual shares. Managed by professionals, these funds pool money from multiple investors and invest in a diversified basket of stocks. Over time, they can potentially benefit from market growth to build wealth in the long term. However, first-time investors may make some mistakes that can impact their experience and potential outcomes.

Chasing recent performance

A common misstep is picking a fund purely because it has delivered high returns in the recent past. It can be tempting to assume that a fund performing well today will continue to do so. In reality, performance can vary across market cycles, and past performance is not a predictor of future results. A more suitable approach may be to understand the fund’s investment strategy, risk profile, and suitability for your own time horizon.

Past performance may or may not be sustained in future.

Ignoring personal risk tolerance

Not all equity funds carry the same level of risk. Small cap and thematic funds, for instance, may see sharper fluctuations compared to large cap funds or equity funds diversified across market caps. Some investors enter high-volatility categories without being comfortable with extreme ups and downs, leading them to exit prematurely when markets dip. Assessing your own comfort with risk before investing can help you choose suitable funds.

Investing without a goal in mind

It is generally recommended that equity funds be linked to specific, long-term objectives. Without a clear goal, investors may lose focus during periods of market volatility. Deciding upfront whether you are investing for retirement, a future purchase, or potential wealth building over a certain number of years can help guide both your fund selection and your review process.

Pausing SIPs during market downturns

Systematic Investment Plans (SIPs) are designed to help you invest consistently, regardless of short-term market movements. Yet, when markets fall, some investors stop their SIPs. In doing so, they miss the opportunity to buy more units at lower prices, a key benefit of rupee-cost averaging. Continuing SIPs during different phases of the market can help smooth out the effects of volatility over time.

Over-diversifying or under-diversifying

Both extremes can work against an investor. Holding too many funds with similar portfolios can dilute potential returns and make monitoring difficult. On the other hand, investing in only one or two funds may leave your portfolio overly dependent on a narrow set of stocks or sectors. A balanced mix that covers different market segments may offer a better balance between risk and potential returns.

Overlooking costs and expenses

Every equity fund has an expense ratio, which is the fee charged for managing the fund. While it might seem small, over the long term it can have an impact on your net returns. Comparing expense ratios within the same category and understanding what you are paying for is an important part of the selection process.

Forgetting to review periodically

Once invested, it can be easy to “set and forget” your portfolio. But market conditions, fund strategies, and even your personal circumstances can change over time. Reviewing your portfolio at regular intervals—say, once or twice a year—can help you decide if any adjustments are needed.

Relying solely on tips or hearsay

Friends, family, and online forums can be a source of ideas, but basing investment decisions only on these can be risky. Every investor’s needs and risk appetite are different. Independent research or advice from a qualified financial professional can help identify a fund aligning with your requirements.

Confusing equity funds with other categories

Some investors mix up or are unaware of different fund categories – such as equity, hybrid or debt funds – expecting similar results. While these categories may share some features, their allocations to equity and debt differ, affecting both risk and potential returns. Knowing the differences before you invest can help set the right expectations.

The role of time

A key benefit of equity funds is the potential for compounded growth over time. This is when your potential returns are reinvested, going on to generate their own returns. Over time, this can have a snowball effect. However, by pausing SIPs, exiting your investments or redeeming units on impulse, investors miss out on this potential for accelerated growth with time.

A compounding calculator can help you estimate how regular investments in equity funds might grow over time. While these are only projections and not guarantees, they can show the role of time and consistency on your investments.

Keeping perspective

Equity funds may offer potential for growth, but they also come with periods of volatility. Mistakes like chasing past performance, ignoring risk tolerance, or pausing investments during downturns often stem from reacting to short-term market movements. Recognising these patterns and staying disciplined may help you make more informed decisions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

 This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

 

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.