During a bull market, investors may be driven by greed or complacency, leading to costly mistakes. Mutual fund investors are no exception. The assets under management of the mutual fund industry grew significantly — from Rs 16.46 lakh crore in December 2016 to Rs 21.37 lakh crore in December 2017. While the market boom can be enticing, it is essential to stay cautious and avoid making irrational investment decisions. Here are six common mistakes to avoid:

INVESTING IN BALANCED FUNDS FOR DIVIDENDS

Balanced funds offer a blend of debt and equity, making them an attractive investment option for those seeking both capital appreciation and stability. However, these funds are now being promoted as a source of regular dividend income. The issue arises when investors start treating these funds as a consistent source of income. Dividends are paid from accumulated surpluses, and there is no guarantee of sustainability. If the market declines, these funds may not have enough reserves to maintain dividend payouts.

STARTING A FRESH SIP FOR SHORT TERM

Investors often rush to initiate short-term SIPs during a market boom, expecting quick gains. However, SIPs are most effective when held for longer durations. Short-term SIPs during volatile markets can lead to potential losses. It is advisable to extend the investment horizon to at least five years to mitigate risks and maximize returns.

TAKING HIGHER EXPOSURE TO MID OR SMALL-CAP FUNDS

Mid-cap and small-cap funds have delivered impressive returns in the past few years, outperforming large-cap funds. However, these segments come with higher volatility and risk. Overexposure to mid or small-cap funds during a market boom can backfire if the market corrects. Investors must maintain a balanced portfolio with diversified asset allocation.

BETTING ON CREDIT OPPORTUNITIES FUNDS FOR HIGHER YIELDS

Credit opportunities funds invest in lower-rated but higher-yielding bonds. The higher returns are tempting, but these funds carry significant credit risk. If the underlying companies default, investors may incur substantial losses. Caution is advised when allocating substantial capital to such funds.

INVESTING ONLY IN DYNAMIC BONDS FOR DEBT EXPOSURE

Dynamic bond funds have the flexibility to shift from long to short-term instruments based on interest rate movements. However, many funds have failed to capitalize on this flexibility. Investors should avoid concentrating their entire debt allocation in dynamic bond funds and consider a mix of stable debt funds instead.

SHIFTING TO DIRECT PLANS WITHOUT AN ADVISER’S HELP

Direct plans allow investors to purchase mutual funds without intermediaries, reducing expense ratios. However, inexperienced investors may lack the expertise to select the right funds or manage their portfolios effectively. Consulting with a financial advisor can provide valuable insights and prevent costly investment mistakes.

CONCLUSION

A booming market can lure investors into making hasty and uninformed decisions. However, maintaining a disciplined investment strategy, focusing on long-term goals, and avoiding the above-mentioned mistakes can help safeguard returns and minimize risks during volatile market phases.