Every day we find advertisements in newspapers, magazines, hoardings, television, and the internet, and even on trains, buses, and metro, telling us to invest in mutual funds.
But before investing, you should know the mistakes to avoid. Knowing them will make your investment journey smooth and will help you reach your investment destination or goal.
Let’s look at the mistakes you should avoid.
Investing without an objective or financial plan– Investing without a goal is like racing without a finish line. That is an essential thing, like the foundation stone of the building. Thinking and planning are crucial to achieving financial goals.
Example: A person aged 25, who has just started working, can aim to buy a car or a house after one or two years or save money for someone’s wedding and then raise the children and their school may aim for financing. The goal may be to save money for college expenses or one’s retirement.
Whatever the purpose, it is crucial to plan and allocate funds according to various objectives.
Investment without a budget– Investing without a budget is like flying a plane without a fuel gauge.
If you are not balancing your earnings and expenses, you can never save enough to invest; this is a sure way to crash because you never know when you run out of fuel.
List your monthly net income and the items you spend each month. You have to make a budget plan to ensure that you do not overspend, or being emotional and impulsive.
Investing without understanding your risk-taking ability– Knowing your risk-taking ability is like buying a cloth without knowing its size. You don’t know if it’s the right size for you and if would you be comfortable wearing it.
A general rule of thumb is that money that is not needed for the next five years or more can be invested in equity mutual funds, whereas the money you need within the next five years can be invested in debt mutual funds. And the money which you may require in the next six months should be invested in the money market or liquid mutual funds.
Invest in a mutual fund without doing homework– It is like trying to drive a car without a driving license. Nevermore buy anything without doing homework is a generally accepted philosophy. It is also suitable for mutual funds.
The next step is to find out which mutual fund schemes are suitable for you after defining your goals, monthly investment budget and your risk profile. You can contact your financial planner or your mutual fund distributor/broker to choose long-term investment plans.
Not doing SIP in mutual funds– It is another big mistake that is entirely avoidable. ELSS schemes hold a portfolio of equity shares and the prices of equity shares are never stable and move up or down depending on various company-specific as well as general market and economic factors.
Note: If you have a long-term goal in mind, you should not be affected by short-term market movements and you need to be calm and patient. At all times, patience pays.