The end-purpose of long-term investment plan is to build wealth over a period of time. Many investors, therefore, plough their money into various financial vehicles such as mutual funds, Unit Linked Insurance Plans (ULIPs), bank fixed deposits, gold, and real estate, among others. Through the power of compounding, investments have the potential to grow over time, thereby allowing you to achieve your financial goals.
As an investor, it is imperative to be wary of common investing mistakes. Doing so helps you minimize your losses and keeps your portfolio from losing value. Following are seven mistakes that you may avoid while investing in long-term financial schemes.
1. Investing in a single financial instrument
‘Do not put all your eggs in one basket’ is a popular adage, which holds true in the arena of investments. It is best to avoid concentrating on a single type of investment opportunity. Instead, you may be a wise investor and spread your money across various financial instruments, such as bonds, stocks, and real estate, among others. Diversifying helps reduce the risk in case one single instrument performed poorly, such as during a stock market crash or a fall in real estate prices. Diversifying, therefore, helps to mitigate risks while allowing you to enjoy good returns at the same time.
2. Investing in instruments that performed well in the past
There are numerous factors that determine the performance of stocks or bond, such as interest rates, political issues, and economic stability, among others. In the event that these factors have a positive impact on the performance of the funds, you are most likely to enjoy high-yield returns. This does not necessarily mean that history will repeat itself and that the top-performing stocks will be successful again. It is, therefore, imperative to do your due diligence and carefully analyze funds that display a steady performance. You may also carefully select a fund manager who has a consistently steady track record.
3. Investing a large sum of money in a Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is one of the best investment plans that can offer you high returns over a larger investment horizon. SIPs have the potential to build a sizeable corpus through the power of compounding. Through SIPs, you may save a fixed amount at regular intervals, such as monthly, quarterly, half-yearly or annually. Such an investment vehicle helps to even-out market volatility effectively while inculcating discipline at the same time. Many investors often commit the grave error of dedicating a large sum periodically in SIPs and then failing to continue investing. This may happen due to a variety of reasons, such as high expenditure, lack of savings, or any other financial problem. To avoid such a situation like this, you may decide on a realistic and feasible amount so as to avoid any strain on your finances.
4. Not investing according to your personal goals
It is imperative to have a goal-based investing approach so as to meet your financial objectives easily. Through a goal-based wealth management approach, you may fulfil your personal goals, such as saving for your child’s education or marriage expenses, taking your dream holiday, buying a new home, or saving for your golden years. To adopt such a strategy, you may plan your investments according to your age, financial situation, risk appetite, and investment horizon. It is also necessary to review your goals and investments periodically. In case your current investments do not help you achieve your personal goals, you may consider updating your portfolio investments accordingly.
5. Not investing in Unit Linked Insurance Plans
If you wish to make an investment for a long-term horizon, a ULIP plan is one of the best investment plans. Such an investment vehicle combines the benefit of investment as well as life insurance. A part of the premium amount goes towards life coverage, while the balance amount is invested in money market instruments, such as bonds, stocks, or funds. You may also enjoy numerous ULIP benefits, such as the power of compounding and additional coverage through riders. What’s more is that you may avail of tax benefits on the premium paid up to a maximum limit of INR 1.5 lakh under Section 80C of the Income Tax Act, 1961. Additionally, the death benefit payable to the nominee in case of death of the policy holder is tax free. Therefore, you may invest in such an investment vehicle for various ULIP benefits. ULIPs are new-age investments that can be done with systematic monthly payment modes as well. If you are looking at getting your life goals done, ULIPs are the way to go!
6. Choosing dividend option over growth option
While choosing the fund to invest in, investors generally decide between two options, which are dividend option and growth option. In the dividend option, the effect of compounding is lowered, thereby hindering the growth of your corpus. A growth option, on the other hand, does not involve payment of any dividend. The accumulated sum, therefore, continues to grow, and you may enjoy a higher return on investment.
7. Failing to boost your SIPs
As time passes, you may generate a higher income, or you may accumulate a moderate lump sum amount. It is wise to boost your existing SIP fund during such times. Doing so helps to boost your investments. The SIP amount and the lump sum you invest are bound to generate higher returns compared to just your monthly investment. If you possess a lump sum amount, do not fail to add it to your SIP if you do not face an urgent financial requirement.
It is rightly said that people should learn from mistakes. You may, therefore, recognize the aforementioned mistakes and avoid making them altogether when making investment decisions. Doing so will help you earn a good return on investment and will help you achieve your financial goals easily.