After saving money, you need to invest it properly to cover risks, save taxes and to generate fruitful returns. Unless you invest, the money saved will lose its purchasing power over time. On the other hand, planned investments would help you fulfill your financial goals with relative ease. For this, you should avoid making investment mistakes.
Mistakes in Investment
Following are some mistakes that may derail your investment journey:
No diversification of portfolio
Like, putting all the eggs in the same basket may spoil the eggs, making all the investments in a single instrument – especially equity – would result in losing all the money. So, to reduce the risk of losing money, you have to diversify by making investments in multiple instruments. Diversification would ensure that you don’t end up losing all your money, even if one of the instruments fails to perform.
Extremely conservative approach
It’s said that taking no risk is the biggest risk. In order to avoid taking any risk, if you put all your money in fixed-income instruments, you would gradually lose purchasing power of the capital invested. This is because the interest earned on fixed-income instruments – like fixed deposit (FD), recurring deposit (RD) etc – are generally taxable and such instruments may hardly beat the rate of inflation. Without any indexation benefits, the returns lag behind the rate of inflation after deduction of taxes, resulting in gradual loss of purchasing power of the capital invested over time.
So, even as the capital invested in fixed-income instruments doesn’t fluctuate – like that of equities during market volatility – the double swords of tax and inflation make the ultra conservative investors poorer.
No idea about power of compounding
Even if an instrument gives lower compounding interest than an instrument giving higher simple interest, after a period of time, the instrument giving compounding return would provide much bigger gain. The difference in gains between the instruments will increase in multiples with each passing year.
Greatest scientist Albert Einstein also once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
So, don’t underestimate the power of compounding and invest in instruments giving a compounding return.
Taking unnecessary risks
The best investment plan is the one that helps you reach a financial goal by taking minimum risk. So, if you can reach your financial goals by taking lower risks, there is no point in risking your money just to get higher returns.
Eying quick returns
One needs to plan his/her investments for fulfilling long-term goals. If the motive is to make quick gains, the chances for losing money will be high. In order to get quick returns from equity, people generally make the mistake of investing in high markets – when existing investors have already made the gains – and exit in low markets after seeing their investments in negative.
However, if an investor enters the markets with a long-term view, he/she can overlook the short-term volatility and stay invested to get higher long-term return.
Not seeking professional help
To derive a long-term investment plan to fulfill your financial goals, you need to do comprehensive financial planning. To chalk out a financial plan it’s better to seek help from a professional financial advisor, who would also handhold you during market volatility to ensure that you stay invested to fulfill your goals.
Failing to invest in learning
Apart from professional help, you also need to invest your time and money in learning the investment strategies. Learning will give you more conviction and help you to stay on course of your investment journey.