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There are different ways in which we save and invest for our goals. However, there are some common investment mistakes that we make while investing but realise them perhaps a bit late. Why not do a course correction if you notice these slips in your investment plan.
- Not considering inflation while calculating goals – One must always remember that the cost of a goal is going to be much higher in future than it is today because of inflation. Look at the cost of education, medical procedures, marriage, buying a house, etc, where prices have risen across the board over the years. For example, if the cost of a goal is Rs.10 lakhs today, it may cost you Rs.16.28 lakhs (a 60% jump) after 10 years assuming a 5% inflation rate.
- Putting all eggs in one basket –If you are getting a wait-listed train ticket, you may try to improve your chances of getting a confirmed berth by either booking a ticket on two different trains or on two consecutive days. Your chances of success in any one of these 4 permutations is higher than if you had explored only one option. This also applies to investments wherein you need to explore various permutations of asset classes (equity, debt, gold, real estate) based on your risk appetite and diversify to avoid sub-optimal returns in the long run. Mutual funds can help you diversify across equity, debt and gold through single or multiple portfolios.
- Not investing as per goals – Most investors save but very few save as per goals. Usually, there is a single pot spread across various investments but none are earmarked for specific goals. Investors typically dip into this kitty and pull out money as needed for various goals. The disadvantage is that most of the wealth may get utilised for nearer goals while far away goals like retirement may get a lower corpus. Goal wise planning removes this deterrent as investment for each goal is separately maintained.
- Starting late – In hindsight, we may observe that we saved less in our early years and try to cover up for this gap in the later years (a typical case of the inverted pyramid). By starting late one tends to miss out on the power of compounding. For example, if you save Rs.10,000 per month for 20 years in a mutual fund SIP at an assumed rate of return of 12% p.a., you could accumulate almost Rs.1 crore but if you save the same amount i.e. Rs. 10,000 for half the period or 10 years, you accumulate only Rs.23 lakhs. Even if you double the monthly saving to Rs.20,000 for 10 years, you get about Rs.46 lakhs but not Rs.1 crore. So the adage ‘an early bird catches the worm’ holds true even for investments.
- Considering insurance as investment – Many of you may not be aware of the returns that your insurance policy provides. Still, insurance is often considered as an investment while it should actually be used only for protection from unexpected events like death, accident, illness, etc. A better way is to buy term insurance which offers pure protection while mutual funds can be used for the investment component. Term plans provide no maturity benefits but provide a larger protection for a smaller premium.
- Trying to time the market – Even experts fail to get the market timing right. Hence one must avoid ‘timing’ the market but switch over to ‘time in’ the market. The latter means that one must be a consistent, regular and long term investor across the highs and lows of the market rather than investing in spurts. This can be done by investing in SIPs offered by mutual funds.
If you plan to be a successful investor, try to dither from these investing mistakes.
An investor education and awareness initiative by Franklin Templeton Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.