Turn Volatility To Advantage: Pitfalls To Be Careful Of While Investing

Turn Volatility To Advantage: Pitfalls To Be Careful Of While Investing - Hemant Rustagi, CEO, Wiseinvest Advisors

Investors face many challenges through their defined time horizon. While some face them at the start of the process itself, there are those who face dilemmas while tackling different market situations. Simply put, the world of investment has many pitfalls and a wrong step taken to tackle them can jeopardise your financial future.

Here are some of the pitfalls that can derail your investment process and how to avoid them:

Delaying investment process:
Many investors make the mistake of delaying their investment process either because they think they have enough time before they need to begin investing or because they feel that they don’t have enough money to invest. It’s a proven fact that investing early has many advantages. Besides, one can begin investing with as little as Rs. 500 or Rs. 1000 thru SIP in mutual funds. Therefore, enrolling for SIP can be the first wise step to kick-start your planned investment process. Remember, a 10 years’ delay will compel you to invest thrice the amount to compensate for the lost time.

Inflation:
Inflation is known as a silent killer as it erodes the value of your money over time. By ignoring inflation, you may end up compromising big time in your ability to achieve their investment goals. To beat inflation, you must focus on earning ‘positive real rate of return.’ To do so, you need to look beyond traditional investment options like fixed deposits and small savings schemes and invest in market linked products offered by mutual funds.
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Ignoring tax efficiency of returns: 
While focusing on how much returns you can get is important, knowing how these returns will be taxed is equally important.  Many investors make the mistake of investing in instruments that offer guaranteed returns but end up paying tax at their applicable rate, which makes a huge dent in their post tax returns. Considering that long-term goals require us to create a large corpus, tax efficiency of returns become utmost important. Investing in tax efficient instruments like mutual funds can allow you to tackle this issue efficiently and have more money in hand to meet your requirements at different stages of your life.

Underestimating risk and /or overestimating returns: It is quite common to see investors either underestimating risk and/ or overestimating returns which impacts them in different ways. While underestimating risks makes them take un-necessary risk, over-estimating returns causes a shortfall in what they may require for a particular goal. To avoid a situation like this, you must make careful investment decisions after assessing your needs as well as giving due consideration to what to expect and what not to expect from an investment option. This will not only avoid a mismatch between returns and expectations but also ensure that you act according to your risk taking capacity.

Compromising long-term goals for short term gains: 
Many investors suffer because they try to time the market. For example, in a rising market they invest more money into equities and in a falling market they increase their exposure to safer investment options like debt funds. Needless to say, by making frequent changes in the portfolio they miss out on sudden gains.  Hence, to avoid a situation like this, you must stick to your asset allocation. Any realignment in it should be done by way of rebalancing your portfolio once a year.  

Discontinuing SIP in a volatile market: 
While investing thru SIP is one of the best investment strategies, it is quite common to see investors discontinuing this process abruptly when the market turns volatile. By doing so, they not only fail to take advantage of the volatility thru ‘averaging’ but also expose themselves to risk of missing out on smart gains when the market stabilises. Moreover, the money so withdrawn gets diverted to unproductive activities that jeopardises their financial future. Having a plan in place ensures that this disciplined approach continues irrespective of the market condition. Remember, investments made in a disciplined manner during volatile periods help in enhancing overall returns. Besides, you will be able to turn the volatility to your advantage rather than worrying about it.