Are you making these investment mistakes?
By steering clear of these pitfalls, you can create a robust investment strategy that works for you in the long term.
Jan 2025
3 mins read
Share:
The first rule of investing is: don’t lose money. And the second rule? Don’t forget the first rule. This famous adage by Warren Buffett highlights the importance of avoiding mistakes that can erode wealth. Did you know that if your 100 investment drops to 50, you need a 100% return just to recover? While much attention is given to how to invest right, it's equally important to focus on avoiding common pitfalls.
Here are the five most common mistakes encountered by investors:
1. Chasing Recent Top Performers
It’s tempting to pick funds based on their recent returns. These figures are fresh and appealing but can be misleading. No fund consistently remains the top performer year after year, as mutual funds go through cycles similar to equity markets.
Instead of chasing past performance, focus on:
- The consistency of returns.
- Portfolio dynamics.
- The fund manager's track record.
- The investment process followed by the scheme and the fund house.
Avoid relying solely on short-term returns. Look for funds that consistently rank in the top 25-30% of their category over long-term periods like 5-10 years. Be cautious of new fund offers (NFOs) without a proven track record, especially those with a narrow investment mandate.
2. Letting Emotions Drive Decisions
Fear and greed are the enemies of disciplined investing. For instance, pausing SIPs during market corrections can be a costly mistake. SIPs are designed to take advantage of lower NAVs during market downturns, helping you accumulate more units.
Similarly, jumping into trending fund categories just because others are doing it, often leads to regret. The key is to make objective, reasoned decisions rather than emotional ones.
3. Attempting to Time the Market
Trying to predict market movements is a futile exercise. Even professional traders often get it wrong. Many investors exited equity mutual funds before the COVID-19 crash, only to miss the swift market recovery that followed.
The better approach is systematic investing, such as SIPs, which allow you to invest consistently regardless of market conditions. For lump-sum investments, staggering the amount over 6-8 months can reduce the risk of mistiming.
4. Over-Diversification
Diversification means not putting all your eggs in one basket. While it’s essential to spread investments across asset classes, fund types, and fund houses, excessive diversification can dilute returns.
Holding 15-20 funds often results in overlapping portfolios with similar underlying stocks. Instead, focus on having one fund in each category, such as Large Cap, Flexi Cap, Mid-Cap, Multi Asset, Debt Funds, International Fund of Funds, and ensure your portfolio aligns with your financial goals.
5. Investing Without Goals
Investing without clear goals often leads to chasing returns and accumulating too many schemes. Whether your aim is long-term wealth creation, retirement, or a specific target like a down payment for a house, defining goals helps you select the right assets and funds.
Write down your goals, estimate the required amounts, and match each goal with the appropriate asset class. For example, equity is suitable for long-term goals, while safer assets like debt funds are better for short-term needs.
Key Takeaways
Avoid these common investing mistakes to safeguard your wealth and achieve your financial goals:
1. Don’t invest based only on recent top performance.
2. Keep emotions like fear and greed out of your investment decisions.
3. Start investing as soon as possible; don’t wait for the “perfect” time.
4. Avoid market timing.
5. Invest with clear goals and a proper plan.
6. Add new funds only if they genuinely diversify your portfolio.
By steering clear of these pitfalls, you can create a robust investment strategy that works for you in the long term.
Share:
PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC)
on the basis of publicly available information, internally developed data and other third-party
sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information,
assure its completeness, or warrant such information will not be changed. The information contained
herein is current as of the date of issuance* (or such earlier date as referenced herein) and is
subject to change without notice. The AMC has no obligation to update any or all of such
information; nor does the AMC make any express or implied warranties or representations
as to its completeness or accuracy. There can be no assurance that any forecast made
herein will be actually realized. These materials do not take into account individual
investor's objectives, needs or circumstances or the suitability of any securities,
financial instruments or investment strategies described herein for particular investor. Hence,
each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard.
The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein.
The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of
the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.
