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If you are planning to save and invest, you will be considering various investment instruments such as mutual funds, insurance, fixed income, real estate and gold. Usually most people end up asking for tips. However, tip-based investment is an illogical way to approach money management. Here are some common mistakes you should avoid while investing.
Deciding based on past performance
If your agent or distributor tells you that a particular fund gave 30% returns last year and insists that you opt for that particular mutual fund, then it is a red flag. Past performance of a mutual fund is not a benchmark to look at for future performance. Looking at returns in mutual funds in isolation, is like focusing only on one part of your body while working out in a gym. You should never look at one piece. If you are looking for a mutual fund investment, compare the mutual fund schemes, fund managers objectives, asset management company’s track record and taxation.
Investing in too many mutual funds
If you are new to mutual fund investments and if you have ended up buying 10-20 equity mutual funds, you are not on the right track. Firstly, understand that the underlying asset in an equity mutual fund is stocks. And there are only these many stocks in the market. If you invest in 10-20 mutual funds, chances are that you will be investing in almost the same stock and your overall returns are likely to reflect that of the benchmark index. Ideally, you should not have more than six mutual fund schemes in your portfolio including equity, debt and equity-linked saving schemes.
Looking for penny stock to make a windfall
It is the most common coffee table or bar discussion on which penny stock to invest to make a windfall. Firstly, you need to understand that investing in stock market is not equal to gambling. Investment in direct stock should be based on parameters such as fundamentals of the company, growth prospects, debt-to-equity ratio, dividend and quality of the management. A free tip at a bar about a stock will not bring you double-digit returns. You need to do your research in details and then invest.
Waiting for the right time to enter market
A lot of time, investors look for the right time to invest in equities. Equity investment is for the long run, so time in the market is important. Also, know that you can never time the market. The simple way to approach the equity market is to take the mutual fund route. Also, don’t get affected by the volatility in the market. The stock market usually goes through multiple cycles. You should look at investment through the eyes of your goal and not through the movement in the market for all your long-term financial needs.