Do’s and Don’ts for investing
Investments are a function of various aspects: risk appetite of the individual, fund available for investment, the choice between various asset classes, investment objectives (long-term capital appreciation or short-term gains), and liquidity preferences. It is a complex process which involves time, energy and a professional approach. ‘Portfolio Management’ has emerged to be the specialised profession for aiding investors. A portfolio manager understands the client’s investment goals, time horizon, risk appetite and advises appropriate allocation of funds in diverse investment vehicles. Opening a demat account is a simplified process, and hence many retail investors even opt for self-management of their funds.
After the physical trading of stock was discontinued, investment penetration in the market improved to a great extent. An investor is always concerned about capital appreciation along with earning sufficient returns. Here are some of the do’s and don’ts of investing:
Research: Whether a professional is hired to make your investment decisions, or you do it yourself; the most important caveat is to invest after adequate research has been done. Even hiring an investment manager or portfolio advisor should be backed by research. You must be able to repose confidence and trust in the person handling your investments, in case you aren’t doing them yourself. In the digital era, there are many varied sources of information – books, periodicals, case studies, literature authored by renowned investors like Warren Buffet and informational television shows. There is no dearth of knowledge available for acquiring information about the basics as well as complex investing.
Have clear objectives: Every investment is time-bound and goal oriented. Investors should be clear about their objective of making the investment. A 50 year old man investing in real estate would be aiming for capital appreciation in the long run, while a 35 year old woman investing in shares would be aiming for short-run returns. The risk profile and investment objective of each individual is different, and it is the duty of every investor to be clear about expected returns, time frames, liquidity preferences and periodicity of returns.
Diversify: A common mistake that early investors make is that they invest maximum or all of their funds in a single asset class such as shares or real estate. It is always wiser to diversify investments to reduce risks and improve the probability of returns. Putting all your eggs in the same basket runs the risk of exposure to higher risks. If the investment fails, the investor would lose the capital invested as well. Diversification across assets helps to minimise risks. Even in the share market, there are stocks bundled as per industry and market capitalisation. Investors can easily pick and choose the amount of total investment to be allocated in these categories, as suited to their individual preferences.
Invest late: Investments should begin at a young age as it takes time to understand the intricacies involved in investing. Making intelligent investments is an art and science and the judgement of when to enter and exit the market takes time to evolve and develop. Investments are best begun during the productive age (20 to 60) without postponing the decision. Make small investments at a young age, but don’t postpone the decision to later. Also, investments should never be made with emotion. They should be thoroughly researched and planned and not based on ‘feelings’ or ‘emotions’.
Ignore liquidity: Investors often make the error of ignoring the requirement of adequate liquidity in the overall portfolio. If all the funds are locked in long-term investments like real estate, fixed deposits etc., it could get difficult to meet short-term liquidity requirements that could arise unexpectedly. It is always advisable to keep a certain percentage of total investable funds in liquid assets, to ensure quick conversion to cash. Some examples of liquid assets are: government securities, mutual fund investments, deposit accounts and investment in shares.
Overanalyse: After researching on successful investment strategies, speaking to financial advisors and making their own calculations, investors often end up overanalysing before making investment decisions. Analysis is no doubt important, but overly analysing the pros and cons of a strategy could waste time and also lead to loss of opportunities for the investor. Funds must be allocated wisely in a time bound manner across asset classes as decided by the investor or his financial advisor. Don’t overthink and miss profit making opportunities.
Investment has undergone a sea change since digitisation and dematerialisation of shares. It has become more accessible, comprehensible and profitable for small investors. Returns generation and capital enhancement are now accessible to small, mid-level and large investors alike. Even foreign investments are possible in the form of shares, bonds and foreign currencies. Appropriate caution should be exercised by investors to minimise losses and maximise gains from investing their hard earned money in any asset classes.