How to Avoid Common Mistakes that Mutual Fund Investors Make

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These days there are so many unique investment products being touted to investors in the market. Some of them themed and take on the mutual fund structure. A large number of Kenyans with an investible surplus aren’t afraid to take on risk and invest in mutual funds. As this trend grows, we should try to avoid some of the pitfalls that happen in a rising market like ours.

Here are the most common mistakes that investors make while investing in mutual funds:

Rear-View Mirror Investing

Investors always make the mistake of thinking that equity and balanced funds offer regular returns, that will always give a positive return. Additionally, investors also think that a fund that has been doing well will continue to do so into the future.  This is a common misconception. Funds are always fluctuating, and thus no income assured. Therefore, investors need patience as returns may only start coming in after 5 years.

Chancing in Fancy Themed Funds

There is a section of the Kenyan market that dislikes the traditional boring buy and hold strategy of investing in traditional securities. This section of the market is always searching for creative investment ideas that would make them more money. Thus, it is very difficult for them to risk risking their hard earned money on these investments that are widely touted to have the magic formula to multiply wealth. However, once a new idea dethrones it, they forget this magic formula and now focus on the new one. Don’t get lost in this never-ending rat race if you want to achieve your financial goals in this lifetime.

Market Timing – a Losers Game

Many investors think that there is a ‘right’ time to invest – catching the market tops and bottoms is a myth. The right time to invest still remains when you have money, and the right time to sell is when you have accomplished your financial goal. Waiting for this ‘right’ time only guarantees that you miss out of good opportunities that may come by.

Therefore, don’t panic and be perturbed by all the noise when everyone is talking breathlessly about new opportunities or market performance. The market will never be short of people with talking points – just pundits who love to discuss every topic threadbare. In the world of investing, these ‘right’ times or so-called events in time, look like minor blips when looked back on after a long period of time.

Herd Mentality & Knee-Jerking Reactions

Most often than not, investors tend to follow the herd and avoid exercising their own individual judgement when it comes to investing their money. By doing so, they end up making the wrong decisions and get caught up in the buzz in the market or media. Most often than not, topics discussed are relevant only to punters who want to build financial positions.

Therefore, avoid making impulsive decisions triggered by such events or news. Investing when the market is on a bull run or redeeming investments when the market is falling, will only hurt your finances. If you must invest, ensure that you take a step back, read about the topic and discuss it with your advisor. Once you have all the necessary information to make an informed decision, invest.

Being Greedy –  the Deadly Sin of Investing

The greatest hindrance to success when investing is emotions – particularly the emotion of greed.  There is an axiom that ‘fear and greed rule the market’. People who understand this, gain from the irrational decisions investors make. When the market is moving up, many mutual fund investors tend to rush in and buy equity funds with the highest returns. This strategy always leads to disappointment as the market most often than not is already run up and is valued expensively.

Stick to your financial goals and portfolio allocations. Don’t alter your original investment plans merely because another fund is performing better than yours. Doing so takes your focus off your goals chasing phantoms in the market. However, if you have some other cash to invest, go ahead and invest, but maintain a long-term horizon. Nonetheless, avoid doing what others do and top-up your fund regularly as you see fit.

5 Quick Tips for Mutual Fund Investing Success

1. Have a financial plan. Invest in mutual funds with a sound financial plan to guide your decisions. This way, market bull runs and market falls will not deter you or have you make irrational decisions.

2. Get good advice. Seek independent financial advice even though you have decided to buy and hold. The right advisor will help you wisely pick the right investment opportunity with a likelihood of continued strength and help you diversify your holdings.

3. Be patient and disciplined. Markets are volatile and it is very tempting to pull out then things aren’t going well – but don’t. Commit to your long-term strategy and stay on course to achieve your financial goals.

4. Avoid temptations and hype. If you follow the market news every day, read and watch the news, the information overload will drive cloud your judgement.

5. Finally, have some faith. I know I shouldn’t bring religion in here but, without faith, you’ll never be able to move forward knowing that you’ve made the best decision possible for you at a given time. Faith is important as it allows you to ride those market waves that can truly test you.

The Bottomline

The bottom line is that patience pays off – ‘time in the market’ is the safest strategy. When it comes to your financial success if pays to invest your time, not just your money. Simply avoid these common mistakes in the future and compounding the existing problem. Focus on you and your financial goals. Go back to the drawing board and decide the objective for your investments and align to your investment portfolio.

Remember that if you are prepared to do something stupid repeatedly, there will never be short of professionals happy to take your money.

Image credits: Top by Pixabay, via Pexels

Meanwhile, You can click on the following links to read more about financial planning:


Disclosure: This information is provided to you as a resource for educational purposes only. 

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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