Top 10 Mistakes First-Time Mutual Fund Investors Make and How to Avoid Them
A RAPIDLY GROWING INVESTMENT AVENUE
Mutual Funds are no longer just for seasoned investors; they have become a favourite entry point for young and first-time investors too, and according to AMFI, India’s mutual fund industry AUM stood at Rs 75.18 lakh crore as of August 2025, up from Rs 39.88 lakh crore in December 2022, a surge of nearly 88% in less than three years.
Source: AMFI Monthly Data-August 2025
https://www.amfiindia.com/Themes/Theme1/downloads/AMFIMonthlyNote_August2025.pdf
Source: Financial Express, Dec 2022
https://www.financialexpress.com/money/mutual-funds-what-amfis-december-2022-data-says-about-mutual-funds-and-what-should-investors-do-in-2023-2944335
This surge reflects increasing investor participation, especially among first-time retail investors entering through SIPs.
However, enthusiasm often brings avoidable errors. Many new investors make mutual fund mistakes that limit potential returns or create unnecessary stress.
Let’s uncover the top 10 mistakes to avoid while investing in mutual funds and how to invest wisely instead.
1. INVESTING WITHOUT A FINANCIAL OBJECTIVE
Investing without a clear purpose is like setting off on a journey without a destination. Many beginners invest in mutual funds because everyone else is doing it, rather than considering their own financial needs.
Why it’s risky:
Without clarity, you may choose funds that don’t align with your financial timeline or expectations.
How to fix it:
Start by finding your financial purpose, like building an emergency corpus, education fund, or retirement plan. Then choose fund types accordingly:
| Time Frame | Suitable Fund Type | Risk Level |
| 1-3 Years | Debt Funds | Low |
| 3-5 Years | Hybrid Funds | Moderate |
| 5+ Years | Equity Funds | High |
2. IGNORING RISK APPETITE
Many first-time investors assume mutual funds are “safe” by default. Risk is often overlooked until a market dip causes panic.
Why it’s risky:
Each fund category carries a different level of volatility. Small-cap funds can swing sharply, while large-cap funds are relatively more stable.
How to fix it:
Assess your risk tolerance with AMFIs' tools or a certified distributor like SAFEinvest, helping you align your investments to your comfort level.
3. CHASING PAST PERFORMANCE
It’s tempting to pick funds that performed well last year, but past returns are no guarantee of future success. Many beginners make the mistake of buying hot funds without research.
Why it’s risky:
Markets evolve, fund strategies change, and a previously top-performing fund may underperform in the future.
How to fix it:
Look at long-term consistency, risk-adjusted returns, and the fund manager’s record.
4. LACK OF DIVERSIFICATION
It’s common for new investors to think one good fund is enough, but that can leave your money vulnerable if it underperforms.
Why it’s risky:
Concentration in a single sector or fund can expose your portfolio to unnecessary losses if the fund underperforms.
How to fix it:
Diversify across:
- Equity, Debt and Hybrid Funds
- Market Caps (Large, Mid, Small)
- Different fund houses
5. STOPPING SIPs DURING MARKET DOWNTURNS
Market corrections scare many first-time investors, causing them to pause or stop SIPs.
Why it’s risky:
Stopping SIPs during declines breaks rupee cost averaging, which helps lower your average purchase price over time.
How to fix it:
Continue investing. For instance, investors who stayed invested through the COVID-19 correction in 2020 saw strong recoveries by 2022.
6. OVERLOOKING EXPENSE RATIO & EXIT LOAD
Returns aren’t everything; hidden costs can eat into gains. Many beginners ignore expense ratios and exit loads.
Why it’s risky:
High expenses reduce net returns, even if the fund performs well.
How to fix it:
Understand expense ratios within the same category of funds.
7. NOT REVIEWING INVESTMENTS REGULARLY
Investing is not a set-and-forget activity. Many beginners make the mistake of ignoring their portfolio for years.
Why it’s risky:
Without periodic review, your funds may drift from your financial strategy, underperform, or become misaligned with your risk tolerance.
How to fix it:
Review every 6-12 months:
- Track performance vs benchmarks
- Rebalance if one fund dominates
- Replace underperforming funds
8. RELYING ON TIPS AND HYPE
Social media or hot tips may tempt investors to act impulsively. Beginners often buy funds based on hype rather than data.
Why it’s risky:
Following others’ recommendations can lead to unsuitable investments and poor diversification.
How to fix it:
Use verified data from AMFI or seek guidance from AMFI registered Mutual Fund Distributors.
9. IGNORING TAX IMPLICATIONS
Taxes affect the actual returns, yet many beginners overlook them when choosing funds.
Why it’s risky:
Different fund types attract different taxes, which can reduce net gains.
How to fix it:
Understand tax rules:
| Fund Type | Holding Period | Tax Rate |
| Equity | > 1 Year | 12.5% (above 1.25 lakh) |
| Debt | < 3 Years | Income slab rate |
| ELSS | 3-year-lock-in | Up to Rs 1.5 lakh deduction |
10. EXPECTING UNREALISTIC RETURNS
Many beginners expect instant wealth, believing their funds will double in a year.
Why it’s risky:
Mutual funds are market-linked, not guaranteed. Unrealistic expectations can lead to early withdrawals, disrupting compounding benefits.
How to fix it:
Be patient. Historically, equity mutual funds have delivered 10-12% annualised returns over 10+ years.
Source: CRISIL-AMFI Mutual Fund Performance Index, March 2025
FINAL THOUGHTS
Investing in mutual funds is simple, but avoiding mistakes is what ensures long-term success.
- Be clear about your financial purpose
- Diversify wisely
- Continue SIPs during downturns
- Review and rebalance periodically
Stay patient, stay informed, and let your investments grow confidently!
Mutual fund investments are subject to market risks; read all scheme-related documents carefully.