3 Missteps Equity Mutual Fund Investors Should Avoid Right Now

The last two years have been a roller coaster ride for mutual fund investors. The spectacular crash of 2020 was followed by an equally meteoric rise that left fence sitters gasping for air. And just as they started building courage to get in, geopolitical tensions played spoilsport!

Rushing in with lump sums

So, you were one of the smart ones who had sensed that buying heavily into a market where the bellwether index was priced at 40 times current earnings a year back wasn’t necessarily the most prudent of risks to be taking. Ergo, you sat in liquid funds and began STP’s (Systematic Transfer Plans) from liquid funds to equity funds. Now, you’re sitting on a neat cash pile - and the SENSEX is down nearly 7,000 points from its October 21 peak. Buoyed by your recent success, and your optimism, you may be led into investing large lump sums on a single day when markets are down heavily. This is best avoided – instead, aim to continue your STP’s in a disciplined manner, or at least stagger your lump sums in a few tranches over the next couple of months. Timing tops and bottoms of the markets is an exercise in futility, so don’t even try. When you do get in, mentally prepare for things to get worse before they get better.

Succumbing to the loss aversion bias

For those who invested into equity mutual funds after the markets had already gone up heavily last year, the famed loss aversion bias will be kicking in very soon’ prompting you to cut your losses. Admittedly, it isn’t easy to see your hard-earned money slipping into the red! Your mind will begin to play tricks on you – the foremost being the voice in your head that tells you to ‘get out now, and get back in when things get better’. Understand that this is a trap. Equities are meant for long-term investing, and it would seem that we’re not quite at the end of the current market rally – although we probably won’t see stocks double in a year as they did between March ’20 and March ‘21. Hang on tight and stay the course.

Stopping your SIP’s

Many a long-term investment goal has been foiled by volatile markets such as the one we are in right now! In fact, a lot of mutual fund investors tend to stop their SIP’s during such phases, without realizing that these are the cycles that will provide a huge fillip to their long term returns through the power of rupee cost averaging and compounding. Keep your SIP’s running with discipline and stay focused on your long-term goals instead of fixating on short term market returns.