In today’s fast-paced world, having ample savings and appropriate investments for the sake of the future is very necessary. Given the increasing awareness amongst people about the need for savings, the popularity of mutual funds and index funds is increasing rapidly. Before we discuss the six common mistakes you should avoid when you choose between index fund vs mutual fund, let us first understand the common difference between the two.
Index Fund Vs Mutual Fund
A mutual fund is a popular form of investment that most individuals prefer for investment and security purpose. Bonds, cash derivatives, stocks, etc. All come under mutual fund investment.
An index fund is also a form of mutual fund which is more passive in nature. The returns are generated on the basis of indices like Sensex there is no allotted manager who decides the division of funds.
When you look at the key differences of index fund vs fund, it comes down to factors like charges, performance of the fund, charged fees, allocation of funds, potential risk factor, etc. To know more, check out https://navi.com/blog/active-mutual-fund-vs-index-mutual-fund/.
Common Mistakes To Avoid
For anyone who is looking to invest in an index fund vs mutual fund, here are some of the common mistakes you should avoid in order to make a successful investment for your future.
For most freshers who wish to begin investing in either index fund vs mutual fund, the cheaper funds look more appealing as they are more economical on the pocket. However, not all economical funds guarantee a return. Even though there is no guarantee of returns for any investment funds, it is important to know that cheaper is not always the best option.
Investing Without Proper Research
No matter whether you are new to investment or have been an investor for a while, not analysing the risks involved and ignoring potential red flags for the sake of investment can be a mistake. Red flags like this risk factor, the performance scale, both good and bad, and their popularity in the investment market.
Blind Investment In Big Funds
Everyone who is into investing does tend to get carried away by big names. No matter which one you pick between index fund vs mutual fund, blindly putting your money into any fund can be a mistake as you tend to ignore the downside deviation and the risk factor involved with these big fund names.
Investing In Too Many Too Soon
Most investors wish to create a strong portfolio for themselves. However, in the spirit of doing the same, overloading your portfolio with multiple funds at the beginning itself can be a mistake. It also plays a major role in deciding whether you should invest in an index fund vs a mutual fund as any more than five funds under your portfolio indicate that you should rather invest in an index fund.
Believing Word Of Mouth
Sometimes, people choose between index funds vs mutual funds on the basis of what people tell them. Usually, people do seek out advice from friends and family members, especially first-timers. However, believing and picking funds for investment on the basis of just known people’s word of mouth can be a mistake.
Basing Investment On Short-Term Performance
The decision of investing in either an index fund vs mutual fund has to be well thought and researched. However, people tend to only take into consideration the short-term performances of the funds they invest and instead of looking at the pattern.
Overall, to conclude, it is important to keep these six common mistakes in mind before you begin investing in either of the funds between index fund vs mutual fund, to avoid making bigger mistakes.