10 Big Investment Mistakes You Should Avoid
Parking wealth into an investment scheme may give good returns, say financial experts. However, depositors may often make mistakes while investing that can have a long-term impact on finances. Delaying investments is one of the biggest and most common financial mistakes one can make. Majority of people don’t start investing in their early age which can result in lower accumulation of wealth. Lack of knowledge, experience and research work can also lead to a ‘bad investment’, say experts. One must look for these factors and keep churning their portfolio accordingly, they say. (Also read: How Should You Start Your Investments?)
Here are 10 investment mistakes you should avoid:
1. Investing without identifying financial goals: Many investors start investing without setting up a goal. According to Brijesh Parnami, CEO, Essel Wealth Services, such investors don’t know how much to invest and do not have a direction for meeting their aspirations. “This is a bad investment strategy. Setting up a financial goal, on the other hand, helps in getting a financial discipline and devising an optimum asset allocation,” he said.
2. Not understanding the investment: One of the biggest mistakes made while investing ‘is not understanding’ the business model of investment. Such investors fall prey to weak business models which are no more profitable after a certain period of time.
3. Mixing insurance with investment: According to financial experts, insurance is not an investment to grow money. Insurance is an assurance that takes care of an individual and his/her family when hit by unforeseen circumstances. According to Mr Parnami, “Most investors confuse insurance as an investment instrument and instead invest in endowment or money back policies which neither provide adequate cover nor generate optimal returns.”
4. Over-concentration in real estate: There’s a belief that in addition to being insulated from market oddities, real estate also provides huge returns and tax benefits. So investors think that real estate is a great investment avenue. However, Amar Pandit, founder of Happyness Factory contradicts this viewpoint. According to him, hoarding too much of real estate in the investment portfolio is not correct. “Many investors borrow fund to invest in real estate and end up leveraged. This is a highly dangerous strategy to adopt. Especially during real estate crashes, the illiquid nature of real estate makes it a lethal investment option,” he said.
5. Not creating a post-retirement corpus: Most investors consider retirement planning to be a distant goal and hence do not start investing for it until they reach their late 40s. Others tend to solely depend on their provident fund (PF) contributions, which are likely to be too small to create an adequate post retirement corpus, say experts.
6. Not understanding the concept of risk: Another mistake an investor makes is not understanding the concept of risk appropriately. “Investors either take too little risk or they take too much risk. Also, their perception about risk keeps changing with different market conditions and the returns that they are getting in the portfolio. This somehow affects the overall return that the client is going to generate,” said Raghvendra Nath, managing director at Ladderup Wealth Management.
7. Letting your emotions rule the investment decision: It is the gravest sin for the investors, say experts. “Without letting fear and greed overpower your decision, the investor should always focus on bigger picture,” said Rachit Chawla, founder and CEO, Finway. “Talking in terms of stocks, short time returns may deviate wildly but in long term, returns for large-cap stocks can average 10 per cent. One should realize this fact and remember that portfolio returns should not deviate much from those averages,” he said.
8. Lack of patience: Everyone knows it but sometime in case of stocks investors forget this mantra, said Mr Chawla. “Investing in stocks require a disciplined and steady approach and one should keep expectations realistic regarding the growth of each stock and the time it will take. Being impatient won’t fetch you anything and can take away many things,” he suggested.
9. Falling for a company: Another mistake that is repeated by people is when it comes to investment in equities. “When a company that an investor has invested starts doing well, this makes him/her forget the fact that stocks is only an investment. No matter how many times the company has given you the return remember one thing you bought the stock to make money, ” said Ritesh Ashar, Chief Strategy Officer,KIFS Trade Capital.
10. A myopic view of tax planning: Most investors believe that tax planning is a tool for minimizing taxes. They indulge in tricks like showing a limited income or weak balance sheet to fool the tax man. “This must be avoided by understanding that the right goal of tax planning is to maximize post-tax income,” said Mr Pandit of Happyness Factory.
What experts suggest?
When it comes to investments, it is always prudent to start with basics like budgeting, and then strategizing investment plan with proper record to evaluate performance. “While making an investment it is imperative to evaluate the valuations without overpaying on any asset-class to generate returns. The investors should focus on creating portfolio with proper diversification without overlapping with long-term view,” said Dinesh Rohira, Founder and CEO at 5nance.com.
The investors should look for a portfolio with lower risk rather than going for the higher risk portfolio. “If you look at the current market situation the ideal portfolio should consist of at least 60 per cent into equity out of which 65-70 per cent should be in large caps, 20 per cent in mid-caps and 10-15 per cent in small-caps,” said Ritesh Ashar, Chief Strategy Officer,KIFS Trade Capital.
“15 per cent of the overall investment portfolio should be into debt. Gold must consist at least 20 per cent of the portfolio whereas remaining 5 per cent should be held in cash to secure the opportunities as and when it gets generated. There should be a systematic sectoral distribution of the fund and one should take into consideration the risk and reward ratio very seriously. The portfolio must consist of stocks which have competitive advantage over its peer group and has the tendency to generate a better value and return,” he said.