Investors often think of what to do while investing. They miss out on points that are a big “NO-NO” esp for first-time equity mutual fund investors. Here we list a few points that should be prudently avoided.
Expecting too much
Retail investors often listen to some friends and family and take a call on investments. They also benchmark returns based on casual conversations. Now, this becomes very tricky. If a friend has got 30% CAGR for last 2-3 years, this in no way a reflection of what might happen in the next few years. Markets might show a negative return for all you know. Now, a 30% benchmark as against negative returns is a bad space for any first-time investor. The Result is that investor is disillusioned with Equity Mutual Funds and swears never to invest again.
Lesson # 1. Do not expect too much. Remember, Equity Mutual Fund is a risky investment and takes time to give good returns. Do not forget in medium to a short run, Equity MF’s may even show erosion of capital.
No Clarity on Investment Goals
“if you don’t know where you are going, you will probably end up somewhere else” - this adage applies to invest as well. Investors should design an investment portfolio that holds a high probability of achieving long-term investment objectives. Simply do not start investing in Equity MF’s without synchronizing investments with the long-term financial objective. And lastly, do not put money into equity MF’s unless the time horizon is minimum 7 years.
Here is an illustration of what not to do.
Ram wants to send his son (17 years) for his overseas education next year. He is short by 15 lacs. He considers investing in Equity MF, Presuming the returns of 2017 will be replicated in 2018-19 and his deficit will be wiped out. This is a very bad idea. There is every possibility that Ram might losses his capital and the important financial objective of sending his son to university might be in a limbo.
Lesson # 2. Invest only after financial objectives are well defined.
Churning too much and too often:
When it comes to investment patience is the virtue. More often than not, it takes a long time to get benefits of an investment and asset allocation strategy. However, retail investors think like novices. Investors look at returns for the past few months and start switching from one fund to another or stopping SIP’s. There is every possibility that this will end up being a bad call. This will not only result in reducing returns through greater transaction fees (exit loads and taxation) and may also result in unanticipated and uncompensated risk in the portfolio.
Lesson# 3 : Never churn or stop your investments based only on returns of the last few months.
Avoid being on your own. Hire a financial advisor
After the advent of direct plans, retail investors have started to consider investing directly and saving on 1 odd percent in yearly costs. This seems prudent and smart but invariably backfires. A good financial planner/advisor generates a much more alpha then mere 1%. Direct plans are good for HNI investors who have a large corpus running into a few crores. However, retail investors may not end up saving a lot by investing directly and may end up eroding their capital.
Lesson# 4: Do not invest in direct plans unless you are an expert at investing.