After understanding the importance of investing; In this segment we will cover how to avoid some common mistakes before investing.
Getting started with investments:
The way to sound investments and developing a decent corpus is a constant learning process. However the key is to understand not the jargon, but the basics of how money works and what investment avenues are out there and which suit you and your requirements.
Common Investment mistakes to avoid:
1. Never ever invest in something you do not understand, just because your friend did it and so you followed suit. Understand the product first and know if his/her needs are same as yours, are you comfortable with the minimum investment required, the lock-in periods etc. Always ask questions to the person offering you the investment option, be it banks, agents, insurance companies and do not take their word for it, have some written proof as many a time the representatives whom you would most likely speak to may conceal some facts or just glorify the return on investment to you. You should not be in for a rude shock when the time comes to get your returns.
2. Never invest in something you feel fishy or too good to be true, such as a scheme that offers double or triple returns compared to any other investment available in the market. Money does not grow on trees and one has to understand that if someone promises to double your money in 2-3 months it is most likely a scam or the means will not be as per the legal regulations of the country or money markets. Keep the greed in check and do not fall for such traps; there are lot of people losing their hard earned money in such schemes every minute.
3. Never invest by taking loans. If you come across a great legitimate investment scheme but are short on cash, do not borrow money for investing. Invest with what you have and what you are comfortable with. When you take loans you create a liability which you have to repay at some point and in most cases it will have some sort of interest. Now say you earn a return on investment at 15% p.a. and your interest on loan is @ 10% p.a. so ultimately your effective return on such investment is only 5% p.a. and you are losing out on the 10% return had you invested without taking a loan. Also in worst case if your investment did not do well and your invested money loses value, you still have the interest to pay and this could make your returns negative and do not forget, you still have to repay the principal amount.
4. Do not venture into the share markets, based on tips from someone. Also do not invest in shares until you understand the basics of what is what and how stuff works in the markets. Investing in shares is not a wrong thing, but speculating could lead to disasters. Always check the company’s track record and its earning potential among other things.
5. Never put all your eggs in the same basket. This holds so true for investments. Just like if the basket falls you most likely lose all your eggs, if the scheme or fund or shares you invested in does not give good returns and all your money is in them, you will lose a lot. Always diversify. Invest in various instruments and have a varied portfolio which covers insurance, mutual funds, debt investments, some equity, gold, tax saving options etc. This will guard you against scenarios where one of these under-perform or give outright low or negative returns. In such case you can book the losses and invest money in some other options where you are getting stable returns.
Once you are aware of how to avoid these common mistakes, you can then start to contemplate your options of where to invest money and how much you can put aside every month to invest.
In the next part we shall cover the different categories in which investments can be classified and understanding the basics of how they work.