6 Times You Have Gone Wrong With Your Investments

Navigating the world of investments can be a challenging task for both beginners and experienced investors. Given the complexity of this landscape, most investors fall prey to impulses and commit some common investment mistakes. In this article, we outline the 6 most common investment mistakes and how you can avoid them.

• Investors lose out on compounding returns by halting SIPs and selling investments in bear markets.
• Over-diversification can negatively impact your portfolio’s returns.
• Neglecting your risk profile and asset allocation strategy can result in unnecessary losses. 

Here’s a list of the most common investment mistakes you should avoid to grow your wealth corpus:

Stopping your SIP during volatile times

This remains one of the most common investment mistakes mutual fund investors commit. When markets go through downswings, you may be tempted to discontinue your SIP and exit your investment. However, doing so can be detrimental to your long-term goals. You had started the SIP with a certain goal in mind. If you stop the SIP mid-way and cash out your investment, this goal will remain unfulfilled. Apart from putting your financial goals on hold, you will also be losing out on the compounding benefits of the investment. Remember that SIPs are all about consistent and disciplined investments. They work on the principle of rupee-cost averaging, whereby you get to buy more units when markets are low and less when markets are high. Over time, consistent investments through SIPs average out the investment cost.

Over-diversification of one’s portfolio

Diversification is one of the first few lessons in every investment handbook. As an investor, you must be familiar with the need for and benefits of diversification. However, you must also be weary of over-diversification. Diversification up to a certain limit is beneficial to your investment portfolio in terms of mitigating risks and balancing returns. However, beyond that point, it can turn negative. Over-diversification reduces the magnitude of gains you could have earned from the well-performing funds in your portfolio. This happens because to invest in new funds, you will have to invest less in each existing fund. In simple words, by over-diversifying your portfolio, you will not lose much, but you won’t stand to gain much, either. Other than that, managing and tracking an over-diversified portfolio is also an uphill task for any investor.

Selling investments in a bear market

Consistently declining markets can make the most experienced investors jittery. This is when most investors slip and commit investment mistakes. During a bear market, you may feel tempted to sell your investment, redeem your funds, and exit the market to cut losses. This is a natural thought process for any panicked investor. However, remaining calm and avoiding impulsive decisions at such junctures can be crucial for the success of your investments. Keeping your focus aligned with the end goal helps avoid such temptations and gain over time. Equity markets tend to recover in the long run and balance out short-term fluctuations. If you exit the market before such recovery, you stand to lose out on its benefits. Remember that every bear market is followed by a bull run and vice versa. Therefore, your investment strategy must be motivated by goals, not just market conditions.

Not paying attention to debt funds

Another common investment mistake investors make is to avoid debt funds altogether. For equity investments, Indian investors turn to equity mutual funds. When it comes to investing in fixed-income securities, Indians turn to tried-and-tested fixed deposits, monthly income schemes, PPF, and other small saving schemes. The volatile and risky equity MFs are investments for high yields, while fixed-income securities are investments for capital protection. This investment philosophy is inherently problematic since debt funds offer better returns than these traditional fixed-income instruments. Ignoring debt funds can actually cost your returns.

Neglecting your risk profile and asset allocation

Ignoring your risk profile and asset allocation can be detrimental to investors. While this mistake is common among beginners, it can also be made by experienced investors during a bull market. Let’s assume you’re an investor with a moderate risk appetite. You generally invest in large-cap funds and avoid riskier equities. However, seeing the performance of risky investments in the bull market, you decide to invest in mid and small-cap funds. This strategy can go wrong at any moment. Changing your asset allocation to follow trends can cost your returns if the trend reverses. In this case, if the bull run ends, you can lose a significant amount of money invested in mid and small-cap funds. In fact, the reversal can sometimes be so dramatic that the returns generated from your large-cap investments over time may also get erased.

Investing in one go

While you can invest in mutual funds through lump-sum investment as well as SIPs, the former route is a little tricky. Investing a large sum of money at once can result in timing risk. To avoid this common investment mistake, you can take the staggered SIP route. With a Systematic Investment Plan, you can contribute a fixed sum at regular intervals to earn compounding returns and tap into the benefits of rupee-cost averaging.

Understanding the common investment mistakes helps you learn how to avoid them. You can devise strategies and approaches to minimise chances of committing such mistakes to build a sizable investment corpus over time. By remaining disciplined, avoiding panic decisions, focusing on your long-term goals, and staying true to your risk profile and asset allocation, you can side-step the potential pitfalls of investing.