As we grow up, we become more and more aware of our financial responsibilities. From saving for ourselves and taking care of our aging parents to securing our partner’s and children’s financial future, all these duties require careful financial planning. But that is where most of us end up making some common investment mistakes. In order to build a secure future for ourselves and our loved ones, we must start investing in mutual funds as early as possible. If you have not started yet, start investing now. However, be mindful of these common financial mistakes which we as investors often end up making while investing in mutual funds:
1. Unrealistic Expectations
One of the most common mistakes we as investors make is expecting unrealistic returns. Investors who have a long-term investment perspective, should create a portfolio considering all the risks and expect realistic returns. No matter how judiciously one picks a mutual fund scheme, no one can actually predict how the ongoing market will perform in the future owing to the dynamic economic, social-political and company-specific factors. So ideally, one should not expect extraordinary returns from an investment and stay grounded by looking at the realistic picture of the market.
2. Unclear Investment Goals
Another financial mistake we often commit is not setting clear and defined investment objectives. To avoid this, one needs to have a clear and complete understanding of his/her future plans and the time period in which he/she wants to achieve them. For instance, an investment objective of buying a car can be met in a relatively shorter period than the aim of owning a house. Unclear life goals can trap one in a vicious cycle resulting in a life involving the burden of unforeseen debt which ultimately spoils the quality of life. If you have any difficulty defining your financial goals, you can visit Paisabazaar.com and get the required assistance.
3. Lack of Portfolio Diversification
The optimum way to get the best results from market is via a diversified portfolio. Often investors tend to invest in only one kind of securities and when the market falls hitting that particular sector of investment, they end up in losses. Thus, it is wise to diversify an investment portfolio by holding different types of mutual fund schemes and distributing the investment risk across them. The performance of a portfolio can be also affected by too much diversification and too much exposure. Therefore, one needs to strike an optimal balance while designing a portfolio which is relevant during changing market trends. You can design your investment portfolio by doing proper research and analysis, however, It is always safer and advisable to take the advice of an expert financial advisor.
4. Focusing on Short Term Performance
A long-term investor should not allow himself/herself to be affected by either gains earned or losses incurred during short periods of time. This is because doing so can land him/her in a false state of success or failure and can motivate him/her to reconsider and repeat the investment strategy. An investor must have clarity whether he wants to have short-term investment or long-term investment as any confusion in this regard can take the investor away from meeting his/her financial objectives.
5. Excessive Focus on Trading
A successful investment requires a lot of patience from the side of the investor. One has to keep calm with respect to the factors concerning an investment’s returns. One should watch the market closely but avoid taking buy or sell calls in any rush. This is because such instant investment decisions not only result in high transaction fees but also traps one in unforeseen risks arising from frequent portfolio churning. One should use the market impulse to reconfigure the portfolio based on a calm and composed mindset rather than reacting to them abruptly.
6. Excessive Focus On Tax Saving
Tax saving is one of the key factors which affect the choice of an investment instrument. However, one should see investment as a means to increase corpus and get good returns rather than focusing too much on how to save tax. Such vision helps an investor choose the right kind of investment instrument which can help them in wealth creation as well as its appreciation.
7. Not Reviewing Investments Periodically
Just making an investment is not enough, its performance should also be reviewed periodically. It is always a good practice to review the investments at regular intervals to enable an investor to take timely decisions regarding increasing the investment or exiting it. Not doing so is a common investment mistake observed among investors. Investors often forget or act lazy in doing such reviews and fall prey to market crashes, incurring heavy losses. Thus, regular review helps an investor in knowing the ups and downs of the market and serves as a signal for timely investment action.
8. Non-alignment between Investor and Advisor’s Financial Objective
One should always take out extra time to find the right financial advisor for oneself. A financial advisor should act and share the same philosophy of life goals as the investor is having so that both can work towards a common goal. A wrong understanding of an investor’s objectives and risk appetite by a financial advisor can lead to a situation where the goals set by the investor and the ones understood by the advisor are poles apart.
However, it is important to note that just having a good financial advisor is not enough, one should do his/her own research and then invest as it is better to be safe than sorry.
9. Not Factoring in Inflation
Another common investment mistake which investors often commit is that they focus on the nominal returns instead of real returns. The real returns can be arrived at by looking at the performance of the investment after factoring in inflation in the economy. One should always keep a check on how the rising costs can impact his/her standard of living and what it would take to meet the rising demands coming out of rising costs. The returns of the investments done by the investor should be effective enough to meet the inflation factors.
10. Emotion-Driven Decision Making
An investor should not allow his/her emotions to drive investment decisions. Investors should make decisions only after proper research and considering trends and facts. Any personal bias can land an investor into a pool of wrong decisions.