Avoid these dumb ways of selecting a Mutual Fund scheme

Usually, when a person starts investing, he starts off with mutual funds. Mutual funds give an investor a lot of exposure to different sectors and industries without letting him pick an individual stock. Choosing a wrong mutual fund can burn a big hole in your pocket. So, it is very important to choose a mutual fund wisely.

Here’s a look at some of the mistakes one should avoid while selecting a mutual fund:

Assuming that lower NAV is better

A lot of investors believe that investing in a mutual fund with lower NAV is better. However, this is not the case. NAV is not a parameter which should be taken into consideration while making an investment. Let us understand this with an example:

In the above example, an individual invests the same amount in two different funds with different NAVs. Assuming that Fund A has given a return of 10% in one year, and Fund B has given a return of 12% during the same period, the total returns generated by the funds are different. So, NAV does not play any role in a fund’s performance.

Chasing Past Performance

While analysing past performance of a fund is one of the important aspects one must consider while investing, paying too much attention to it can ruin your portfolio. One must understand that past performance does not mean future performance and the fund will not continue to give the same returns in future. One cannot deny the fact that past performance helps in understanding the performance of the fund, but it is not the only reason based on which one should invest.

Too much attention on short-term performance

Different asset classes provide different returns at various stages of economic cycles. Some stocks tend to perform better than others based on the sector performance over a specific period of time. However, things change drastically over a longer period of time. It is always better to look at a fund’s 3-year, 5-year and 10-year performance rather than looking at its 1-month or 3-month performance. A fund’s short term performance is usually influenced by the performance of sector funds.

Invest in order to save taxes

Investments up to Rs. 1,50,000 are exempt from tax under section 80C of the Income Tax Act. Most of the investors invest money into mutual fund schemes during the month of February and March in order to avail tax benefit. However, this is not the right approach towards investing. Investment should be done on a regular basis. Also, one needs to know that not all mutual funds qualify for tax exemption. One needs to invest in ELSS in order to avail tax benefits, which comes with a lock-in period of 3 years.