Mistakes That Can Cost You Dearly

These are challenging times for investors as they have been facing volatility in the equity as well as debt markets. Even gold, an all-time favourite investment option of most Indian investors, has been giving them a hard time.

To tackle situations like these as well as to achieve investment success over time, it is crucial for investors to follow the right approach and make the right decisions. Retail investors need to more careful as they have a tendency to make abrupt investment decisions and thereby expose themselves to risks that can jeopardise their financial future.

Let us discuss some of the common mistakes made by investors and how these can be avoided.

• Investing without a plan: Many individuals start the process of investment without determining their objectives and deciding the right asset allocation to achieve these objectives. As a result, they end up making their portfolios either too aggressive or too conservative.

Both these situations expose them to different types of risks. While an extremely aggressive portfolio can take investors beyond their risk-taking capacity, a conservative portfolio can leave a huge gap in what they set out to achieve and what they achieve after completion of the defined time horizon.

By getting into the habit of planning and following that plan, one can avoid making ad hoc decisions and enhance one’s chances of success tremendously.

• Investing in tax-inefficient instruments: While tax efficiency alone should not drive one’s investment strategy, it can make a substantial difference to a portfolio’s ultimate size. Many investors make the mistake of relying heavily on traditional investment options such as FDs, bonds and debentures to achieve their investment goals. However, considering that these options generally yield low returns and that one has to pay taxes on these returns as per the applicable tax rates, it makes a significant dent on the post-tax returns of investors falling in higher tax slabs.

Therefore, tax efficiency has to be an essential element of one’s investment plan along with portfolio mix, investment philosophy and management. The ultimate objective should be to fund one’s current and future requirements by maximising returns in a manner consistent with one’s means, future needs and risk tolerance.

• Underestimating risk and/or overestimating reward: Different types of investments have different risk profiles and one should expect returns commensurate with that. The key to investment success is to maintain the right balance between risk and reward.
• Compromising long-term goals for short-term ones: Investors often lose sight of their long-term objectives in order to benefit from some short-term opportunities. Consequently, they end up making haphazard investment decisions like moving out of an asset class completely and moving into another asset class doing well at that time. Needless to say, decisions based on market moods often result in investors losing focus from their goals.

The right way to achieve investment success is to focus on one’s asset allocation and continue the investment process despite the prevailing market conditions.

• Being too scared to try out different investment options: Investors often hesitate to look beyond traditional investment options as they are not conversant with the smart options offered by mutual funds. As a result, they often miss out on opportunities to earn higher returns. A case in point is the current market conditions, which offer the potential to earn higher returns from FMPs as well as income funds.

It is a proven fact that mutual funds score over other investment options in terms of the potential to generate higher returns, liquidity, tax efficiency, variety, professional fund management and transparency. Therefore, investors must start making MFs an integral part of their portfolio.

• Discontinuing SIP in a falling market: For those who don’t have lump sums to invest, a Systematic Investment Plan (SIP) is the best way to build up capital over a period of time. However, it requires discipline to continue the process irrespective of the state of the market.

There are investors who panic and are tempted to discontinue their SIP investments whenever the market witnesses a fall. However, the fact is that such situations provide opportunities to investors to benefit from averaging. Therefore, one needs to carry on in order to reap benefits in the long run.

• Doing it yourself: Many investors do not consider finding a good advisor an important activity. As a result, they either end up making wrong investment choices or dealing with those who don’t do justice to their hard earned money. It is vital to deal with advisors who have the knowledge and the capability to ensure that one remains on course for achieving one’s objectives.

Hemant Rustagi
CEO, Wiseinvest Advisors Pvt. Ltd.