Common mistakes that investors tend to do

By: Debanjan Guha Thakurta

The term, ‘investments’, sounds so simple, isn’t it? To all of us it’s a three-step process: buy when the price is low, sell when the prices go up and make money. Sounds simple? I bet it does. But frankly speaking it is not so.
There are some common mistakes which seem to be general for all investors.
Below we will try to figure out the mistakes and also we will suggest the steps to correct them.
1) Lack of Financial Planning: This seems to be the most common mistake which every single investor does. Whether the investor is a layman or an expert, a major chunk of the investors tend to fall into the trap of not having a good financial plan.

We at have client investment specialists (CIS) who are there to guide investors if they need assistance on any investment decision, e.g. if an investor wants to invest into mutual funds but don’t know what funds they should buy. Our CIS team will help the investor to take the right investment decision by calculating the investor’s risk appetite taking into consideration their age and levels of income and will give proper investment strategies.

Moreover, we have an experienced in house research team which comes out with different research reports. Our research team not only tells which funds to buy but they also tell the investors about the funds that an investor should not buy and its reason.

Similarly they can also watch interviews of reputed fund managers sharing their insights on the economy and on the funds.

2) Investing into the same asset class: People often fail to diversify their investments into various asset classes.

If an instrument gives a profit to investors then there might be a tendency for some investors to stick to the same instrument. For example, if I invest into shares of a company and its price goes up suddenly or sharply, then I will have the tendency to put more money into the same stock without keeping in mind the fact that equity markets are extremely volatile and may fall to lower levels the very next day.

So as a rule, never invest all your money into a single asset class; instead diversify your portfolio into different instruments and into different sectors.

To know more you can visit some of our existing contents, the links for which is provided below
• Why Diversify?
• Global Diversification Of Portfolio
• Another reason why you should invest in mutual funds: Diversify in a cost-efficient way

3) Time: We all want our profits to grow at a phenomenal pace without taking into consideration the market and economic situation. At the end of the year or month we all want to see our returns in the green and not in the red.

When we see our portfolio is in red some investors may sell their investments in a jiffy. If one invests into the equity markets, then he/she has to give at least 3-5 years for his investments to grow. Same thing applies to investment in mutual funds also. If one takes a closer look then one can find that the equity markets have performed the best over a longer period of time because the market can ride out different market cycles – both bad and good

4) Too many different investments: Investments are good but it is better if it is limited to some quality and profitable investment instruments only. One shouldn’t diversify too much of his/her portfolio, otherwise gains made by a good asset class will be countered by loss made by another asset class.

For example, suppose you have investments spread across different asset classes namely fixed deposits, mutual funds, insurance, savings account, equity shares, debts, PPF, NSC and etc. When equity markets starts to perform then it is expected the equity shares, mutual funds will give robust returns. So at that point if an investor keeps huge amount of money idle in his saving account then he will be deprived of the potentially higher returns offered by the mutual funds and equity shares.

5) Speculation and Hot Tips: Many investors lose money simply because they tend to speculate a lot with their investment decisions. The investors, in order to earn quick money, often buy stocks of unknown companies which may or may not perform in the future. Following blindly a stock or a hot tip offered by some market guru/expert doesn’t necessarily mean the value of the instrument will go up or down. It all depends on the market condition and other technical and fundamental factors.

If you are planning to invest into equity shares then check the nature of the business the company does. If you find it to be satisfactory and think that the company and the sector have a chance to outperform in the near future, you can then invest. Otherwise you should opt to stay away.

In the case of mutual funds, always buy quality funds which have performed over the years. Although past performance does not qualify the fact that it will generate the same percent of return in the current situation also, but it gives a clear idea about how the fund has performed in prior years. The other factors to look into include: 1) expense ratio; 2) performance of the fund during market downturns.

Expense ratio is the expense that an investor has to pay the fund house on a yearly basis. This charge is deducted from the value of the mutual fund. Expense ratio is the expenses that the fund incurs, including management fee, administration and transaction costs, and marketing. The lower the expense ratio, the better it is for you, because you pay less.

Investing into the mutual funds is very easy compared with other asset classes and moreover they are managed by professional fund managers who know how to allocate and manage the money in volatile market situations.

6) Not monitoring their portfolio: Another reason why people lose money is because they simply don’t tend to monitor their portfolio. Review your portfolio at least once a year and look which are performing and making money for you. If an investor is not being able to monitor his/her portfolio due to lack of time then they can take the help of our Client Investment Specialist team, who can help the investors with timely advice.

7) Buying investments for Tax Benefits: People often invest into tax saving instruments to avoid paying up extra taxes. But it is always advisable to get a financial benefit in terms of higher return, rather than to get a mere tax break.
The above steps do not guarantee you that your investments will give a zooming return but still if one follows these easy steps then their chances of making losses can be minimised.
Author – Debanjan Guha Thakurta, India

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