Investment can often be, to some extent, a game of luck and chance. Whether the investor is a seasoned one or an amateur, it is really easy to make mistakes during a market spike. Here are some of the common mistakes that you can avoid:
#1 – Having unrealistic expectations
As an investor, it can be quite easy to hold unrealistic return expectations during a market spike. The fact that the price of a stock doubled in one year does not imply that it will repeat itself the following year too. It is important to realize that market returns are volatile and tend to fluctuate a lot. If certain mutual funds give you 70% returns for a year, it is blatantly unrealistic to expect them to give the same result in every other year.
Investing should be viewed holistically, keeping in mind factors such as risk-return trade-off, asset allocation, and investment time horizon. At times, investors are lured into investing in a product based on the rate of return offered. In such a case, the risk-return trade-off needs to be taken into consideration. A higher return can be generated on your investment, at the cost of a greater amount of risk.
Try to allocate your assets across various asset classes such as equity, debt, real estate, etc. By doing so, you would be essentially balancing out your portfolio according to your investment goals. Each of these assets had a different amount of risk and expected return associated with it. Additionally, if you have a shorter time horizon for investment, it is generally advisable to invest in fixed income securities, instead of equity and gold. With a longer investment time horizon, you can invest a greater proportion of your funds in riskier asset classes.
#2 – Choosing equity funds based on their short-term performance
When investing in equity mutual funds, always try to consider their performance over a long duration. In a rising market, all equity mutual funds may seem to perform well. When picking equity mutual funds, your focus should be on choosing one that has been consistently performing well, that is, across various market cycles. For example, over the past 20 years, the HDFC Tax Saver Scheme was one of the best-performing ones, generating an annual return of 28.77%. On the other hand, LIC MF Equity, being one of the worst performing schemes, returned a mere 8.29%. Think about it this way- investing 1 lakh in the LIC MF Equity scheme would have given you Rs. 4.92 lakhs over a period of 20 years. The same amount of money, when invested in the HDFC Tax saver scheme, would have become a whopping Rs. 1.57 crore! Some of the best-performing Mutual funds (over a long-term) include Birla Sun Life Tax Relief, HDFC Equity Fund, Franklin India Prima Fund, and Reliance Growth Fund. Funds which have proven to be the worst long-term performers include LIC MF Tax Plan, LIC MF Growth Fund, JM Equity Fund and Taurus Discovery Fund (Regular Plan). (Economic Times
#3 – Investing without a plan
When you invest in a haphazard manner, you risk ending up with insufficient savings and inadequate returns. Invest smartly, keeping in mind your financial objectives, risk appetite, as well as your current financial situation. While it isn’t easy to predict a market peak ahead of time, you can still follow certain investment strategies to make the most of the market spikes:
- Balance out your portfolio in terms of equity and debt investments.
- Make sure you have adequate cash for a rainy year, or two. There is nothing worse than being forced to exit your investments at the most inopportune time. Keep a margin of safety by having enough cash in the bank to help you go through market disruptions, or even better – buying on dips!
- Follow the buy-and-hold policy, especially when there is a market spike.
- Embrace the momentum by investing in assets that perform relatively well.
#4 – Stopping ongoing investments
High market valuations can give rise to caution among investors. Those facing such situations may decide to discontinue their current investments in the hopes of protecting their portfolio from a probable downfall of the market. But doing so may lead to them missing out on additional returns if any. At market peaks, you should follow the age-old policy of buy low, sell high. It is a mistake to stop your ongoing investments till the market corrects itself. In April 2017, the Sensex crossed the 30,000 mark, an all-time high at that time. Later it even breached the 36,000 mark. Investors who waited on the sidelines during this time missed out on returns of as much as 20%.
#5 – Selling funds on underperformance
Mutual funds that have been performing poorly in their category certainly raise red flags, but it’s definitely not a signal that you need to exit. Many good mutual funds with years of good performance can face temporary setbacks. When faced with the decision of continuing or discontinuing investment in an underperforming fund, you should wait for its recovery, instead of making a hasty exit. For making this decision, you should consider all aspects of the mutual funds you pick, including the fund manager’s experience, the investment process, as well as your risk profile, and investment goals. For example, think about the portfolio distribution of your preferred mutual funds and if they fit within your financial objectives. You can also use a mutual funds screener tool to compare, to choose the right one.
When investing, keep in mind the risk-return trade-off, and have an overlook of the fund’s performance history to determine the consistency of its returns. While investment can be a game of luck and chance, you’re likely to have a solid amount of control on your portfolio if you avoid these rookie mistakes. Always stick to sound investment principles and do your own research before investing, to further broaden your investment perspectives. When you’ve invested, it is important to stay patient, learn from your mistakes and not panic in times of volatility.