Monday, March 16, 2009

10 Investment Mistakes to Avoid

We are always in pursuit of perfect investment tips so that our money is safe ,secured and earns us above average returns. While this is desirable by everyone,not all manage to make perfect investments. There are quite a few who have made one or more investment mistakes that they should have avoided. Here let me state 10 such very obvious mistakes that you must guard against at all times:-

1. Buying any insurance plan other than pure Term Plan

I am of the firm opinion that we all must have life insurance for self and family members,but, I strongly recommend you to buy only Term insurance and not any other plan like endowment,money back etc. The reason is very simple.In term plan the companies charge you premium only to cover the mortality charges while in endowment plan they charge you huge charges like admin charge etc over and above mortality charges. In traditional endowment plans as much as 40-50% of the premium paid might just go in servicing the charges for first few years thereby severely impacting the returns that you get. Hence, look at insurance plans as pure insurance and not investment tool. Buy only pure term plan from any insurer.

2. Falling for "New Fund Offer" in Mutual Funds

Another big scam out there is the "New Fund Offer" bait that mutual fund companies use to lure customers. New Fund offer basically sells on the premise that you get units at lesser value of Rs 10 while older funds might have NAV much higher than that. Hence in new fund offer you get more units. But this argument is big fallacy since there is basic difference in the way mutual fund and normal stock/equities work. In equities there is difference in the intrinsic value of the stock and market value, while in mutual funds the intrinsic value and market value are same. Hence more units at lower NAV does not mean better deal for mutual funds. Also in new fund you don't know the track record of the fund and the performance of fund manager. Hence, its like taking a shot in the dark not knowing the target and hoping for the best. My advice: Stay out of New Fund Offer, always invest in funds with proven track record over 5-10 year time frame.

3. Investing in equity /mutual funds only on the agents recommendation

Lot of people put their hard earned money in funds only on the basis of their agents recommendation without doing even basic research on the fund quality,its performance track record,fund manager and his credentials etc. While doing research may not be easy or tenable for all, it certainly does not mean that one should put money where agent tells us. Agent mostly have their own interest to take care of first before they take care of yours and hence their advice may not be best for you.They may be guided by the motive of making commission and hence might advice you accordingly. My advice :Do some preliminary research yourself before investing;if you cant do it then take a certified financial planners view.

4.Not investing in Health/Mediclaim Plans

Another mistake that people do is to never think about the medical contingencies and the effect it could have on ones mental,physical and financial health. It can wreak havoc on your finances at times. Hence, its almost a necessity to have medical/health plans for the whole family so that you are well prepared to meet any such eventuality should it arise.My advice:Buy a floater plan of at least Rs 5 lakhs for the family from a good general insurance firm.

5.Too much or too little exposure in equities

Equity markets have always evoked extreme reactions which also reflects in the investing habits of people. The mistake with equity investment that most people do is to have either too much or too little exposure. Both are not desirable. Too much exposure means you are exposed to the vagaries of markets beyond manageable limits and too little exposure limits the upside gains opportunity that these markets provide. So how much equity exposure is right for you? The thumb rule is to subtract your age from 100 to arrive at the equity portion of your investible corpus. For example if your age is 30 , then you should have 70%(100-30) of your portfolio invested inequities. My advice:Stick to 100-Age rule for equity investments.

6. Concentrated portfolio

As the old adage goes"Never put all your eggs in one basket" we should always look to have a diversified portfolio. Concentrated portfolio's are much more risky than a well diversified one and hence can cause severe damage in difficult times. My advice: Have a well diversified portfolio comprising of investments in gold, equity, debt, bonds, mutual funds, FD etc. The proportion of each of these components will depend on your risk appetite and financial goals.

7.Not monitoring your portfolio

Another mistake that people tend to make is to stop monitoring their portfolio's after they make their investment. It is very important to keep reviewing ones portfolio at regular intervals to find out which portion or fund is under performing and whether there is any need to change asset allocation. Remedial measures must be taken periodically be weeding out bad performers from time to time.My Advice:Never underestimate the power of reviewing portfolio regularly. It can help you grow your money faster.

8.Splurging on credit cards

Lot of people fall prey to this one. Credit card being such a convenient product makes splurging very easy for us . We all need to stay out of it because it can put severe strain on your savings and investments. My advice: Use credit card wisely. Never buy luxury for self on credit.

9. Taking Loans to invest in IPO/stocks

I know that there are quite a few people out there who don't mind taking loan and investing it in IPO(Initial Public offering ) of companies hoping to make a quick kill on listing day. They hope to return the loan and pocket the profit made. While this may work at times, it is not a very smart thing to do since we don't know for sure whether we would certainly make a profit on listing. Also as a thumb rule never borrow money to invest in stock market hoping to cash in on bull market or someone told you that this stock will do well or your friend made decent money that way. My Advice:Never borrow to invest. invest only when you have surplus saved out of your earnings.

10. Starting too late

This is the classic one. most of us do regret not having started early on investment. Very few of us do manage to start investing right from their first salary. The power of compounding works wonder when someone starts early.So friends, if there is one mistake you don't want to commit, it should be this one. My advice: The best time to invest is today. Remember its the early bird which catches the worm.

Stay wise n Stay Wealthy....

By Rajeev Ranbir Singh

Please visit http://moneyforinvestment.blogspot.com

Article Source: http://EzineArticles.com/?expert=Rajeev_Ranbir_Singh

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