Mutual fund is a popular investment option that allows investors to pool their money and invest in a diverse range of asset classes, such as equity, debt, gold, and more. However, investing in mutual funds requires careful consideration and understanding of the underlying asset class to make informed investment decisions.

Ashish Shanker, MD & CEO of Motilal Oswal Private Wealth, spoke to CNBC-TV18 to discuss what investors should avoid when investing in mutual funds.

One of the critical mistakes investors make is taking an investment decision without understanding the basics of the underlying asset class. It is essential to understand the characteristics of various asset classes and their behaviour over long time periods, as well as the risks associated with them.

“Investors need to first understand the asset class they are planning to invest in, for example, whether it is gold, whether it is equities, whether it is real estate or fixed income, and there are obviously a lot of subcategories. The investor should try and understand the nature of that asset class because every asset class will have its own journey and one cannot compare one asset class to the other," Shanker said.

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Investing solely on the basis of past performance is another common mistake that investors make. While it is important to consider past performance as an indicator of future performance, it should not be the only factor that determines investment decisions.

Chasing performance and moving from one fund to another can also harm investment returns in the long run.

Another mistake that investors should avoid is having too many mutual funds in their portfolio, leading to over-diversification. While diversification is important, having too many funds can make it difficult to track performance and achieve investment goals.

When investing in mutual funds, it is critical to have a financial goal and an investment charter. A financial goal brings discipline and a process towards investments, helping investors stay focused on their objectives.

Understanding the risks associated with each asset class and setting realistic goals can help investors achieve better outcomes.

Shanker said, “Having a goal is the most important thing. It’s not just important to have a goal, it is also important to write down how one will get to that goal. Everybody may not get to the goal in the same manner. But what happens is once one has a goal, he/she can start working towards it."

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(Edited by : Anshul)