This week in Groww we will highlight a few issues and areas where investors make mistakes.
These mistakes apply to both mutual funds and stocks and hence, investors should make sure that they keep the below points in mind before taking a dive into the investment world.
1.Stopping your SIP during volatile times
This is the most common type of mistake that investors commit.
Some investors have a knack of discontinuing their SIP (Systematic Investment Plan), once they see the markets crashing.
However, investors should understand that this is one of the biggest mistakes they can commit.
In this scenario, investors should think about the goals that were set with the set up of a SIP. With these goals in mind, they should bear this that if they stop with the SIP investment, they will be losing threefold.
First, on the compounding of the money part, second, on getting a larger number of units (as if the markets fall, the investors will get a greater number of units as the NAV of the fund decreases) and lastly the goals of the investor have to be put on hold.
Also, an SIP develops a healthy habit of disciplined investing among investors. If a naïve investor discontinues the SIP investment, he/she won’t be able to reap the maximum benefit of investing in a SIP.
Similarly, investors should also not pause the SIPs when the markets are overvalued. S
IPs follow the concept of rupee-cost averaging and therefore, investors must keep the SIP running to gain optimally.
Another mistake pertaining to SIPs that investors make is starting with a short-term SIP (say for six months to a year).
This is again a blunder as the true potential of a SIP lies in compounding.
Therefore, investors should make sure that when they think of starting a SIP, the horizon should be of a longer term.
2.Over-diversification of one’s portfolio
Investors must have come across a popular adage which says “Don’t put all your eggs in one basket”.
While this is absolutely true for a retail investor who diversifies up to a certain limit, it might turn out to be negative for an investor who has over-diversified his/her portfolio to include stocks of various sectors and categories.
This practice of over-diversification of portfolio directly impinges on the investor’s goal or aspiration.
The investor through diversification will only be able to lower their risk up to a certain point.
Post which, the diversification won’t lessen the risks any further.
One more disadvantage following this kind of methodology is that it would be an uphill task for an investor to manage such number of stocks.
3.Selling investments in a bear market
The continuous downfall of the market can make an investor jittery.
Given this backdrop, the investor would be tempted to redeem his/her mutual fund investment. But, one must remain calm and not press the panic button at the critical juncture.
One should always keep in mind the goals they have in mind and the needs to be met by the investment.
Therefore, they should not be overly concerned and overjoyed by bearish and bullish trend of the market.
Every bear trend is in the market is followed by the bull; resulting in the recovery of market from the lows as well as helping it scale a new peak.
4. Not paying attention to debt funds
Most retail investors in India are of the opinion that mutual funds are risky instruments and invest only in equity funds.
But the fact is that mutual funds invest in both equity and debt.
Investors who were previously confused about the type of funds can find the exact definition of a mutual fund after the re-categorization norm came into the picture.
Most people in India invest in very safe instruments such as fixed deposits, post office savings scheme (Monthly Income Scheme, Senior Citizens Savings Scheme), Public Provident Fund (PPF) etc. for regular income and peace of mind.
However, we should keep in mind that debt mutual funds generate better returns than these types of investments.
Therefore, retail investors might look at these avenues for allocating their money.
5.Neglecting your risk profile and asset allocation
This type of mistake is pertinent mostly during the time of a bull market.
An investor with a moderate risk appetite and whose investments are primarily in large caps might start investing in risky counters such as mid-caps or small caps due to peer pressure.
This strategy might also turn haywire for a particular investor.
The returns of many years which have been generated by large caps might be erased in matter of months by investing in mid-caps and small caps (Actually happening in the markets today)
6.Investing at one go
Investing large sums in equity Mutual Funds is a tricky affair.
Not many investors have been successful in this scenario. Though one can invest all of his/her money at one go.
However, this is not the best method.
The investor is exposing himself to timing risk.
It is a staggered approach to investing.
Systematic transfer plan helps the investor to invest at regular intervals and optimize his/her returns. The risk is also distributed if the investor employs the money at different time intervals.
Now that you know the most common ways you are going wrong with your investment, you can work on them and make sure they don’t repeat again so that you can have a successful financial future.
Obviously, these are not the only ways people can goof up in the investment industry and you, as an investor, must always be involved with how your investment is performing.
If you need expert advice, Groww is always happy to help! Just drop us an email to [email protected] or contact us on our customer support number.
Disclaimer: The views expressed in this post are that of the author and not those of Groww