Investing plays a major role in achieving financial security and boosts future planning to be independent in life. When it comes to making investment decisions, people are often influenced by their own emotions and by the views of those around them. Due to this, people often end up making sub-optimal investment decisions which derail the pace of the financial journey. However, many of the common investment mistakes that people make can easily be avoided. (Also Read: Balancing Income And Expenses: How To Create A Monthly Budget And Stick To It )
To understand the situations that lead to these errors, Ms. Radhika Gupta, MD & CEO of Edelweiss Asset Management Limited (EAML) explains the 10 most common investment mistakes and the ways to consciously avoid them. Ms Gupta has set up the country’s first domestic hedge fund and is India’s only female head of a major asset manager.
According to Ms Radhika Gupta, one must avoid these 10 investment mistakes to boost and improve the investment journey:
1. Too much love: Biases stem from experiences. This means that if one has a suitable experience with a particular fund, then one ends up investing in various schemes offered by the same fund house. However, this is not optimal for investing as every fund house has certain skills. One must recognise these skills and choose the funds accordingly.
2. One for all: Different asset classes have unique skills and one must not apply similar metrics to judge all of them. Something that matters to equity funds may not be important to debt funds. For example, the individual stock holdings in arbitrage funds are not relevant because these funds are fully hedged. However, in equity funds, they are very important.
3. Perils of passive: Ms Gupta explains that passive funds are a low-cost way to generate index-linked returns. However, not all passive funds are suitable as some track bad indices or others have a large tracking error. Due to this, it underperforms the benchmarks. Passive investing requires research just like other forms of investing.
4. Apples and kiwis: Categorisation of funds is done in order to distill several types of fund offerings and make it easier for investors to understand the propositions of each type of scheme. However, one must dig deeper into categories and comprehend that two funds within a single category can be markedly different from each other.
5. Discretion on discrete returns: Point to point returns do not have much significance because they assume that one invested on a particular date years ago. Additionally, they do not indicate the fluctuations in returns during the period. Instead, one should look at the rolling returns that can better indicate the average investor experience.
6. The monster of one-year return: One-year returns can prove to be misleading. Even though it is the most published metric, it is also highly unreliable as it indicates nothing about the fund manager’s skills or the expectations from the fund in the future. People should mostly ignore it, says Ms Gupta.
7. Global gyaan: A theme or an investment product that may work well in one market might not really be effective in another market. For example, exchange-traded funds or ETFs have huge structural benefits in the US, but, in India, index funds are a better structure because we do not have a suitable market-making infrastructure.
8. What do I hold anyway?: The only way one can make good decisions about an investment portfolio is by knowing what one actually holds in the portfolio. One could read fund manager commentary, market reviews, as well as investment blogs, but it is better to open the monthly holding statement and review the investments that one holds.
9. Copy thy neighbour: Create a customised portfolio that is all about ‘you’. Do not copy the herd or blindly follow your friends/acquaintances as every individual is unique.
10. Switching costs: Ms Gupta states that costs determine every purchase decision. When it comes to buying a mutual fund, the fund fee is not the only cost that one has to incur. One ends up paying in switching costs between taxes and exit loads. Every time one switches or redeems and buys another product, a cost is incurred. One must be aware of these costs.