The increase in financial awareness, which was underway for the last couple of years, has pushed forth multi-fold growth in first-time investors who are young and tech-savvy and from tier 2, tier 3 & beyond cities. It is clearly visible in the rise in the steady growth in Demat accounts in India. The number of Demat accounts in India touched 87 million, a 17.2% CAGR during the period FY 13 to February 2022.
As more first-time investors join the market, it means more people need to be made aware of the capital market risks and mistakes. Off-the-cuff investments can derail the complete process of wealth creation. Instead of adding to your financial gain, it could be the cause of loss of money. Each investor has a different risk appetite, therefore, you should adopt a well-structured strategy for optimal returns. Charting out the potential mistakes beforehand can reduce the chances of bad investments.
Here are some of the key mistakes that investors must avoid:
Investing without proper research
Most investors spend the required time and research in making investment decisions. However, that’s not true for all. First-time investors are usually too eager to start their journey. This lack of planning and research can lead to hasty decisions and even losses. Before making any investment decisions, a thorough analysis and understanding of a company’s business model and past performance are crucial. As a result, you’ll know whether the business is flourishing or not, making investment decisions easier. It will also give you better insights into its growth potential.
Chasing the trends
Too often, investors get swayed by the trending stocks in the market. Adding to it, social media further creates a personal bias creating an inclination towards a particular industry or stock every now and then. Investing just on the basis of hearsay without proper research can lead to bad investment decisions. For every trending information, try to identify the source and do your own research in order to make well-informed investments.
Not diversifying investment portfolios
A golden rule ignored by most new investors is the diversification of the investment portfolio. While most seasoned investors allocate their funds in a diverse set of asset classes, investors who are new to the market fail to do this. However, in the financial markets, it is always wiser to stick to the theory of diversification. A diversified portfolio helps in reducing the risk of losses. For instance, if one of your investments takes a dip, it doesn’t necessarily impact your complete portfolio. Therefore, instead of buying stocks of just one company, try to diversify your portfolio by investing in different companies or asset classes.
Expecting immediate results
In today’s fast-paced digitally equipped world, most people look for quick returns from investments. And when they see no growth over a relatively smaller period of time, they bail out. However, that doesn’t make sense in the financial markets. Investing is a gradual process, and sometimes it takes longer than expected to show any meaningful returns. The growth in stocks is dependent on the business performance of the company and, therefore, may take longer than expected to show required returns. Hence, having realistic expectations when making investments is crucial.
Having unclear investment goals
Starting an investment journey without setting an end goal can surely be a faulty decision. Instead of adding to your wealth, it could drain all your investment funds. Therefore, if you are already investing or planning to start your journey in the financial market, the first step is to set a monetary goal that you want to achieve in a set period of time. The next step is to determine your risk tolerance. Once you have a clearer picture of what you want to achieve, it will help you plan better in which asset classes to invest. For example, equities have high volatility in short term but can outperform other asset classes in the longer run. Thus, make sure to set your investment goals to garner maximum returns.
On a final note, making mistakes is a part of every investor’s journey. However, knowing what they are and avoiding them altogether is the way to minimize losses and enhance your chances of making profits.
By Mr. Jyoti Roy, DVP- Equity Strategist, Angel One Ltd