10 investment mistakes to avoid & make your portfolio ‘dent-proof’

Building a portfolio with the right strategy can be a life-changing decision. Investors often fall for the wrong products without understanding the markets, investment basics, and trends. This leads to losses in their portfolios in the long term. In an ET Markets Exclusive interview, we spoke to Chirag Muni, Executive Director of Anand Rathi Wealth to understand the nitty-gritty of the investment world. Here are the top 10 mistakes one should avoid while investing in the markets. Edited excerpts:

1. Not starting early

There is no ‘good time’ to start. Time waits for no one. The earlier you start, the earlier you will see the power of compounding.

For example, an SIP of just Rs 1,000 over 35 years has the power of becoming Rs 60Lakh whereas an SIP of Rs 10,000 will become Rs 60L in 17 years if both grow at an expected rate of 12%.

2. Not setting investment goals

Any action without direction is almost equal to jaywalking on a highway. Defining the objective is the first step of investing.

Ideally, your portfolio goal should be to earn your expected return while factoring in inflation within your investment tenure.

3. Lack of asset allocation strategy

There is no ‘one-size-fits-all’ solution in investing, however, some standardisation can be done through asset allocation.Your asset allocation strategy should be based on factors like goals, investment horizon, risk appetite and liquidity requirement.While investing, you should have a strategy with the right asset mix based on your risk appetite to meet your goal. Debt and equity have a low correlation and a combination of these two assets can help you target a return of around 12% based on your horizon of investment.

Equity MF has delivered an average return of 14% over a longer tenure and debt MF has approximately delivered a 6% return. These portfolio mixes can help in targeting respective returns with calculated risk.

4. Over/Under diversifying portfolio

An over-diversified product impacts the returns of a portfolio while an under-diversified portfolio increases AMC or fund-level risk. This risk needs to be kept at a minimum by maintaining an asset allocation strategy with a maximum of 8-10 funds in the portfolio.

5. Not understanding ‘Market swings are normal’

A volatile market is the true test of an investor. Do not lose patience during market swings. Stay invested and don’t panic sell. Invest any lumpsum available, in case of market dips, from peak to trough which is greater than 10%. You can also rebalance your portfolio in case of any deviations from your asset allocation.

6. Do not invest and forget

Review your portfolio at least twice a year and take corrective actions, if needed.

7. Following the market sentiments

Most people tend to follow the market sentiments and end up buying at higher prices and selling at low prices. Make informed decisions based on research rather than market movements.

8. ‘Insurance is not an investment’

Often investors end up considering insurance as an investment due to mass mis-selling. When you compare the IRR, these insurance products have been generated against the equity funds or simply Nifty 50, the margin is huge. Investors can opt for term insurance for a life insurance cover and a health insurance separately.

9. Not creating an emergency fund

One should have liquidity when it comes to their portfolio for rainy days. Keep 6 months’ worth of expenses parked in a separate basket of liquid funds.

10. No Tax Planning

This is another classic mistake made by investors which leads to loss of money. Simple instruments like ELSS investments, PPF investments etc can help you go a long way.

Also watch: Top 10 investment mistakes to avoid !