Things You Need To Unlearn While Investing

"For important goals like retirement planning and children’s education you must invest in equity and equity oriented funds to stay ahead of inflation."

Investors need to follow certain investing principles to ensure healthy growth in the portfolios over time. However, there are investors who follow certain stereotypes and beliefs that cause them more harm than good. It usually happens when they follow advice of those who neither have the expertise nor the experience to provide guidance in their investment process. Therefore, if you have been following these stereotypes, it is time to unlearn these to bring your investments back on track. The sooner it is done, the better it would be. Here are a few stereotypes and beliefs that you need to unlearn.

Investment cum insurance is the right strategy: Many investors look for simplicity while investing and often opt to invest in insurance products that are essentially investment cum insurance products. These products neither offer the kind of returns that one should get on long-term investments nor the kind of risk cover that may be needed. Therefore, it pays to keep your investment and insurance needs separate and choose suitable options for both. For example, the combination of a term plan and mutual fund investments can be ideal to practice this.

Safety of the capital should get top priority at all times: While the concern about one’s hard-earned money is understandable, the key is to remember that inflation is a far bigger risk over the longer term. If you earn negative real rate of return i.e. gross returns minus inflation, the value of your money will keep going down. Therefore, for important goals like retirement planning and children’s education you must invest in equity and equity oriented funds to stay ahead of inflation. If you invest systematically, the impact of volatility on the portfolios can be minimised.

Having too many funds can protect me from volatility: If you are one of those investors who believe that having a large number of funds in the portfolio can protect you from volatility, you need to think again. In reality, it works to your disadvantage as it makes monitoring the progress of the portfolio quite cumbersome. The endeavour should be avoid overlap in the portfolio.

Investing is all about picking the best performing funds: While mutual funds are a simple and effective investment option, investing in them is not as simple as picking a few top performing funds off-the-shelf and build a portfolio. Considering that different segments/themes/sectors perform differently over different time periods and have different attendant risks, picking top performing funds can expose you to much higher risks than what your risk profile may allow. Therefore, invest in funds that are suitable for your risk-profile, time horizon and have a consistent performance track record.

Profit booking is the key to investment success: One of the key objectives for every investor is to make money grow over time. However, there are investors who believe that booking profits periodically can be the best way to do so. Simply put, they try to time market. No wonder, they often find the market moving into opposite direction after exiting and re-entering. Therefore, the right strategy is to honour your time commitment as holding an investment – provided the performance is consistently above average in comparison to the peer group – for longer duration works in your favour. 

What’s the hurry to start investing for retirement?

Younger investors often delay investing for their retirement, thinking there is enough time for retirement. As a result, they can suffer during the most important phase of their life. The truth is that when you start investing early, you benefit from power of compounding and true potential of an asset class like equity.

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.