A Few Irrational Decisions That Can Prove Costly

Over the years, a disciplined approach of investing through SIP has emerged as a popular mechanism for investors to achieve their investment goals. This is not surprising, since it allows them to limit their downside and reduce the variance in their returns. Also, by investing a fixed amount at a set interval, regardless of market conditions, investors can remove emotions from the decision-making process.[EasyDNNnews:PaidContentStart]

If you are an investor who has adopted this disciplined approach, you have already made a great beginning to your investment process. However, it is equally important to understand that asset allocation and a goal-based investment process go a long way in creating the groundwork for longterm investment success. This approach allows you to focus on capital safety while investing for the short term, on safety and growth for the medium term, and on staying ahead of inflation while investing for the long term. There are a few other important aspects that require smart decision-making to benefit from the true potential of a wonderful investment option like Mutual Funds.

For example, investing a significant part of your portfolio in a single mutual fund, having too many funds for a single investment goal, investing aggressively in risky funds like sector and thematic funds, as well as not having a defined time horizon while investing through SIP are some decisions that can not only derail your investment process but also make you compromise on returns as well as increase your portfolio risk. Avoiding these mistakes can ensure that there are no gaps between what you set out to achieve and what you achieve at the end of your time horizon for each of the goals.

Let us analyse why it is not a good idea to have too many funds from a single fund house. One of the major benefits of investing in mutual funds is the availability of choices, both in terms of types of funds and the opportunity to invest in different investment strategies and philosophies. When you invest a significant part of your portfolio in the schemes of a single fund house, you forfeit opportunities to benefit from the expertise of other fund managers. Besides, it is possible that the investment strategy and philosophy of a fund may not work during certain market conditions, and investing a large part of the portfolio could result in underperformance.

Then, there is the issue of over-diversification in the portfolio. It is important to remember that mutual funds themselves are a diversified investment vehicle. While having a variety of funds is important for different asset classes and time horizons, having too many funds for a single goal can make monitoring the portfolio cumbersome. If chosen well, one can achieve a higher level of diversification with a few funds.

Considering that equity by itself is an aggressive asset class, investing heavily in aggressive fund categories can take you beyond your risk-taking capacity. While investing in Equity Funds is the key to staying ahead of inflation, it is equally important to have the right exposure to different market segments and avoid investing heavily in aggressive fund types like sector and thematic funds. While these funds have the potential to deliver higher returns during certain phases, increased volatility can compel you to make haphazard changes in the portfolio, and that can impact your financial future.

Having a defined time horizon is another aspect that prepares you to tackle market volatility. An asset class like equity requires a time commitment to get the best out of it. Many investors make the mistake of not having a defined time horizon while initiating the process of investing through SIP. This is not the right approach, as depressed markets can compel you to stop your SIPs. A defined time horizon enables you to continue the investment process, irrespective of market conditions.

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