A few pricey investment blunders can have a significant negative impact on your finances. Here are a few frequent financial blunders you may be doing without realizing it, as well as how to avoid losing money as a result. If you want to achieve your financial goals, one of the most important investments you can make is in stocks and bonds.
Investing without financial goals
Investing without a financial purpose is akin to eating without knowing your appetite or health status. People who invest without a financial purpose in mind may find themselves in a scenario where they are short on cash when they need it most. For example, a fund worth Rs. 5 lakh might be used to buy a car in two years and a fund of Rs. 50 lakhs may be used to generate a Rs 5 crore retirement corpus in 35 years.
Not checking expenses related to investments
Investing in stocks, mutual funds, and other investments comes with a set of costs. Such costs may accumulate over time, reducing your investment returns to that level. To get a clearer view, focus on the returns after deducting the necessary expenses when investing money in an instrument. You may have to pay brokerage fees, exchange fees, and other expenses, for example.
Ignoring the real rate of return
Many investors make the mistake of focusing just on the nominal returns on their investments. A nominal return is a return obtained by an investment before expenses, taxes, inflation, and other factors are taken into account. Assume you have put Rs 1 lakh in a one-year fixed deposit at a rate of 6% per annum. Despite nominal returns of 6%, your true rate of return would be only Rs. 1,295, or 1.29%.
It’s a typical mistake to concentrate solely on nominal returns, which can sometimes result in negative returns. Make sure your investment has the highest potential positive real rate of return. Long-term wealth-building can be aided by earning a high real return.
Not considering the tax liability
Tax liabilities on short- and long-term income from investments in assets such as equities, debt, real estate, and other types of assets differ greatly. Before you invest, learn about the taxes that apply to the revenue from such assets. It can assist you in selecting tax-advantaged investments and provide you with higher returns.
Not ensuring sufficient liquidity
Investing without considering your liquidity requirements could lead to a financial calamity. Setting a liquidity threshold that takes into account your rent/home loan EMIs, utilities, insurance, and other expenses, as well as investing the surplus cash wisely in line with your goals and risk appetite, is a good idea. When investing in securities with extended lock-in periods, consider the impact of the invested funds not being available until the investment matures.
Not diversifying adequately
When it comes to investing, many people make the error of not diversifying their portfolios to match their financial objectives. ‘Adequate’ diversity indicates that it’s neither more nor less than what’s required to reduce your investment portfolio’s total risk. Over diversification reduces your return on investment; on the other side, lack of diversity puts your portfolio at danger of volatility.
Investing based on hearsay
Investing solely based on hearsay, such as stock tips or mutual fund plan ideas, might result in significant losses. Before investing, make the necessary effort to learn the rules of the game by reading investment-related books or articles, watching tutorial videos, or even enrolling in an online course. Instead of making judgments based on hearsay, you should seek a competent and neutral investment advisor if you have any reservations about investing.