6 Things Small Investors Need To Avoid
Posted on September 30 2020
Unknowingly the investors act in ways that can harm their interests. Behaviour is the main thing to do with. If these small but importance behavioural aspects are kept in check or improved upon, it will benefit their investment portfolio to a great extent in the long run.
Accumulating a lump sum: Eagerly waiting to accumulate Rs 50,000 over 10 months, instead of beginning with Rs 5,000 straightaway, is neither right nor an adequate investing strategy. It is not correct because it is the amount that will be spent on an impulse purchase and not adequate because while you accumulate the money which earns a meagre 4% savings account interest. The mantra to be followed is: invest as you have earned. If you draw a steady paycheque on a monthly basis then you invest monthly.
Saving instead of investing: Savings instruments, like fixed deposits, offer safe and certain returns, desirable to fulfil the short-term goals. Taxable interest income and that may not beat the extension, therefore, are their downside. For long-term goals, such as children's education and a retirement corpus, investing in equity-oriented instruments is important. The returns are tax-efficient and likely to beat the extension.
No goal or time horizon: When encashing investments, it matters less that the tenure of your SIP that has been completed. What really matters is whether you require the money to meet a desired goal. If it is not so then even if the SIP tenure is over, you can stay invested and your investment will continue to earn scheme returns.
No incremental increase: As income rises, one requires to increase the investments too. This will make sure that the intended corpus keeps pace with extension as well the increase in the one's standard of living.
Going by past performance: It is common for the investors to confuse the past performance of equity markets with the future returns. Hence, when the going is good and the valuations are probably above the average then the investor may commit higher amounts to the markets than what their risk profile permits. On the other hand, when the past performance is bad and the valuations are cheaper then the investors may keep away from the markets. Both the scenarios are far from ideal. A rewarding strategy is to follow an asset-allocation-based approach and do a periodic portfolio re-balancing.
Not accounting for the power of compounding: Investing is a rewarding experience for the patient investor. Rs 5,000 invested monthly at a rate of 12%, will amount to Rs 63,413 in a year. This is just a 6% appreciation on a capital of Rs 60,000. This appreciation will rise to 36% over 5 years i.e., Rs 3 lakh appreciates to Rs 4.08 lakh. The appreciation shoots up to 92% over 10 years, and Rs 6 lakh will obtain Rs 11.5 lakh. One has to keep in mind that Rs 5,000 is invested on a monthly basis.
To successfully accumulate large amounts, in order to meet the important of financial goals in life, planning in advance, an early start and staying the course are a must.
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