Simple Investing

Mistakes to avoid while investing

Age old wisdom suggests that real investing is boring and it’s very simple. However, in reality, what is simple and boring has turned out to be tedious and difficult for most investors to follow. Owing to the lack of financial education, retail investors end up basing their money decisions based on what are the options available and which of it is convenient to carry out, without much thought. Over the years, we have come across several portfolios which investors have put together without a second thought. Of these, given below are most frequent types that one should be aware of. The aim here is to educate the readers of the most often made mistakes in the investing journey and what one can do to correct it.

Rohit Shah
CFP CM - Founder of Getting you Rich

1. Poorly designed & balanced
Asset allocation considerations should be the core of your portfolio construction. The basic definition demands that a portfolio should consist of group of assets classes such that risk is spread across various asset classes. It is a known fact that various asset classes respond to a development in the market in varying ways. The important point to note here is that the principle of diversification is a means to manage risks. Investors often build portfolios to maximise returns without taking into consideration the risk-reward trade off.

When designing the portfolio, be mindful that within mutual fund investments (for equity exposure) investments should be spread across various categories of funds which have varying mandates, risks, and return potential. Very often investors aggressively invest in a certain type of funds with an aim to maximise return, say mid cap or small cap funds. But what is forgotten is that such portfolios tend to be very volatile, thereby creating uncertainty in one’s financial journey

2. All over the place portfolio
For many it’s convenience that defines portfolio construction. People have multiple accounts, be it banking or for other products, all opened with a similar aim of saving and investing. Such an arrangement ensures that there is too much confusion and it becomes difficult to take stock of one’s financial situation.

It like this, when one visits a restaurant, do you end up ordering all the items on menu card? The answer is No. Likewise, buying all available financial instruments too is not a good idea. One has to take into consideration the risk profile andinvestment objective before signing-up for a product, more importantly mutual funds. My experience, suggests that a maximum of six different types of mutual funds is good enough to cover all the type of short, medium and long term financial requirements.

3. Comparing apples with oranges
Many investors get confused between absolute and CAGR returns. The missing factor when most of the investors compare returns is the time value of money. It can be an apple to apple comparison between say a liquid mutual fund v/s FD, if only you take into consideration the time value factor.

For investors who are new to mutual fund investments, learning to read and understand the returns profile of a fund is very important. This is because the return figures may not match with one’s mental calculations figure, thereby leading to a panicky situation. One can overcome this situation by using portfolio trackers, which are freely available online. Such platforms will help you keep track of your investments on a regular basis and show the returns in a meaningful manner.

4. Not being consistent
Being consistent with your investment is one of the easiest ways to fight volatility when it comes to long term wealth creation. Some of the often seen detrimental investor behaviour is - rushing to make taxsaving focused investments at the start of new year, discontinuing SIPs in turbulent market, to name a few. As an investor, it is important to know that at times market cycles may get very long, stretching over several years, say five years. You should see these years as an opportunity to average out one’s investments, which is what SIPs help with over years.

5. Very profitable but minuscule
There are cases where investors have generated outsized returns by staying inactive for many years in mutual funds. This is because the power of compounding kicks in over the years along with the benefits which accrue over the years. That said an investment of Rs. 5,000 in an ELSS fund touching Rs. 45,000 in 10 years is great with a CAGR of 24.57%. But this is not enough to move the needle to the portfolio of say Rs. 1 Cr. The trick is to identify good investments, invest regularly and take sizable positions to generate meaningful gains.

6. My money life is complicated
Anything that does not add value in your financial life should be seriously questioned. Remember, reducing the spread of financial life is the order of the day. Investors spend more time in logistics, coordination, compilation and compliance rather than strategic thinking. Many investors manually transfer the money every month from the salary account to investment account when a recurring NEFT can save time. Ideally your moneylife should be available on a single screen to monitor and review it periodically. The idea is to consolidate and monitor the portfolio. Un-complicating your financial life should be a top priority for all investors.

7. Noise-based actions
When it comes to investments, there is plenty of ‘short-term’ thinking going on. If you follow goal based investing principles and if the portfolio is designed correctly under the risk management framework, then short term volatility should not be a matter of concern. Most often the right action to go about is to do nothing. Reacting to every development heard/read around actually hampers your financial well being. 

To sum up, investing can be very powerful if simple and well-thought steps are taken and followed to its logical end. Refrain from emotional investing as it will only hamper your hard earned money’s growth potential. With this we hope, you dear readers, will not repeat any of the above mentioned mistakes.