The year 2019 saw the economy on shaky ground and many corporate scams get unearthed. This gave many a sleepless nights for investors across various asset classes. On the equity market front, the barometer index, BSE Sensex, hit its all-time high in 2019, where there were days when it zoomed more than 1,000 points. At the same time, there were days were it fell close to 900 points. Debt investors were a jittery lot thanks to the various defaults and ratings downgrades. Click here to read about how equity, debt, gold investments did in 2019 here.
To protect your money box in 2020, here are 8 financial mistakes you should avoid.
- Do not time the market
A retail investor should never time the market; we typically do not have the wherewithal to do it. For small investors, equity should be seen as a long term investment; time in the market is more important than timing the market. So, invest via mutual funds (taking the systematic investment plan or SIP route is the ideal route) and do not let violent swings or volatility phase you. Invest with your financial goal in mind instead.
- Do not make knee-jerk investment decisions
A stock market bloodbath is enough to deter the most seasoned of investors. So, it is unfair to expect retail investors to stay put and not give into the noise when markets are volatile. Unfortunately, when markets tank, retail investors usually end up making the wrong choice. Some stop their SIPs in equity funds while others redeem their investments to avoid further losses.
However, do keep in mind that volatility is inherent to equities. It is practically impossible to predict how markets will behave on a certain day.
Do not panic. One should invest in equities with a long-term time horizon – one-year and anything shorter is the wrong way to go about it. Don’t be in a hurry to sell, invest in equity with an investment horizon of at least 3-5 years. One year is too short a time period for equity. Even if this downward phase does last for a few months, don’t change your asset allocation. Be disciplined with your investments and add to your investments as and when you have surplus fund.
- Do not over-diversify your mutual fund investments
Investors think that the way to achieve diversification is to invest in lots of mutual fund schemes. However, the truth is that no additional diversification is provided by investing in more funds beyond a point, writes Dhirendra Kumar, CEO, Value Research, in his recent column. “Mutual funds are not an investment by themselves. They are a way of holding the underlying investments which, for equity funds, are stocks. The reason why too much diversification is pointless is that the stocks held by similar funds tend to be a similar set. Beyond a small number like five or six, when you add more funds, you are generally adding more stocks that are similar or identical to what you already have,” he wrote.
- Do not solely base your investment decision on past performance
For mutual fund investors, a fund’s past track record plays a critical role when it comes to deciding on investing in it or continuing with a particular scheme. It shows whether the fund manager has been consistent in executing a particular strategy with good results.
However, do not look at past performance of a mutual fund scheme in isolation. Select scheme based on fund managers objectives, asset management company’s track record and taxation.
- Do not go overboard with fixed income
Fixed income instruments are considered to be safer investments as returns from these are less volatile than those on say equity. However, there are certain risks that even these fixed income instruments face, one of them being inflation, which will dilute the real value of your investments in hand. This is also one of the reasons that financial planners advocate portfolio diversification. You need all types of investment instruments to be able to stand strong and steady in the face of financial volatility/ contingencies.
- Do not treat insurance as investment
Getting insured does not mean you have invested too, these two products are completely different. Do not make the mistake of perceiving them as interchangeable and mixing them up, they are apples and oranges. The objectives of investment and insurance are different, while the former is a corpus-building, goal-oriented activity, the latter is a form of protection against medical contingencies and the possibility of dying before you have fulfilled your financial responsibilities.
- Not having a big enough emergency corpus
Setting aside a certain amount will help you prepare for unforeseen expense/s. Given that the biggest certainty of 2019 has been a rise in uncertainty, it helps to be prepared for it in 2020. Experts suggest a contingency fund equal to 3-6 months’ household expenses. This should include insurance premiums and EMIs and the corpus should be reviewed every year.
- Do not keep tax-saving investments for the last minute
As a first step, calculate how much more you need to invest to reduce your tax outgo. Many taxpayers don’t know that tuition fees of up to two children is eligible for deduction under Section 80C. For many parents with school-going children, this takes care of a large portion of their tax-saving investment limit. Do not just blindly invest for the sake of saving tax.