Avoid these investment mistakes in 2020

The year 2019 witnessed a jittery ride, where the broader index (S&P BSE Sensex) hit its all-time high and, concomitantly, jumped more than 1000 points on several days. On the other hand, there were these days as well, when it declined to around 900 points. Such steep declines would have given many investors sleepless nights. Moreover, this is not just limited to equity investors, even debt investors experienced a lot of fluctuations due to various defaults and rating downgrades. Nonetheless, by avoiding the below-mentioned mistakes, you can protect yourselves from major shocks.

Market timing
A lot of investors around the world try to time the markets and attempt to buy at low and sell at high. This is called an active investment strategy and is extremely difficult to pull off. For retail investors, what makes sense is to cut all the market noise and invest in a more disciplined manner. Usually, investing via systematic investment plans (SIP) helps you in volatile times, wherein, you would buy more units when markets are down and fewer units when they are up.

Over-diversification
Being humans, we are bound by our emotions, which leads to risk-aversion behavior. To avoid even the minimum risk and keep returns expectation on the higher end, more often than not, people over-diversify their portfolio. However, here, one should remember that after a certain point, diversification plays a very little role and does nothing but only adds to your costs. Do not invest in the same category of mutual funds and call it diversification. The true diversification is to invest across border asset classes, such as equity, debt, gold, real estate, etc.

Past performance
The past performance is something that is available for you to judge your funds' performance over a while. However, making an investment decision, solely based on funds past performance, can prove to be harmful. As, while driving, we do not only look at the rear-view mirror and drive, similarly, making investments based on just funds' past performance is not the right way to invest in mutual funds. Rather it is important to look at various parameters, such as risk, fund managers track record, fund houses investment philosophy, and fund’s portfolio holdings.

Mix insurance & Investments
It is always prudent to keep your risk protection and investments separate, as mixing both of them would neither solve the purpose of risk protection nor that of the investment. Traditional life insurance products and unit-linked insurance plans (ULIPs) are the ones that mix investment with insurance. In these, some part of the premium paid goes for risk protection and some for investment. However, these may prove to be a very inefficient way since these are not as flexible as mutual funds. Like mutual funds, you cannot switch from funds across the life insurers. Also, they carry a long lock-in period and, if withdrawn (surrendered) before a specific period, they usually fetch you a demotivating surrender value. Hence, keeping risk protection and investment separate is much more effective and practical.