NPS – National Pension System

Retirement. A variety of ideas come to mind when you hear this word, including travel, daily expenses, doctor visits, and so forth. It would help if you had a steady investment in some pension scheme like PPF, EPF, or NPS to last until the end because, post-retirement, you are unemployed or without a reliable source of income.

In addition to helping to create a retirement corpus or offering pension services, several schemes provide investment options. In addition to Public Provident Funds (PPF), Employee Provident Funds (EPF), Fixed Deposits (FD), and others, there is one more program focusing on retirement plans called the National Pension System (NPS).

National Pension System (NPS)

The Government of India-backed and PFRDA (Pension Fund Regulatory & Development Authority) controlled NPS is a distinctive pension program that offers both assets and deficit accessing a single investment and ensures a monthly pension after retirement.

NPS Eligibility

  • All Indian citizens, whether they are residents or not, between the ages of 18 and 65, may participate. At 60, one can join the NPS and keep making payments until they are 70.
  • Individuals should have their Aadhar card linked with their PAN number.
  • Individuals should fulfill the KYC requirements as per the Subscriber Registration Form.

How NPS Works?

  • Individuals with NPS accounts can contribute a minimum of Rs. 1000 per annum.
  • PFRDA then pools the investments in a pension fund.
  • PFRDA-approved fund managers then invest the funds in diversified portfolios of government bonds, corporate debts, and shares.
  • The returns or interest rates offered by NPS vary according to market conditions.
  • Upon retirement, the individual can withdraw a tax-free matured amount equal to approximately 60% of the investment.
  • The remaining 40% must be invested in annuities, which generate monthly pensions through generated interest amounts.

Features of NPS

  1. Low-cost scheme, requiring just a Rs. 1000 minimum yearly investment.
  2. Open program for all NRIs and citizens of India, ages 18 to 65, whether employed by any company or self-employed.
  3. Enables the choice of fund managers and investment strategies.
  4. The matured amount can be easily withdrawn after 60 years of age or withdrawn early after three years of investment.
  5. Enables fund diversification through asset classes, which are groups of assets based on the level of risk they involve.
  6. Using the dedicated NPS Portal, people can access their accounts from anywhere using a 12-digit Permanent Retirement Account Number (PRAN) card.
  7. Tax benefits of up to INR 2 lakhs for working individuals and a tax-free maturity amount upon retirement.

NPS

Tax Benefits of NPS

Section 80CCD (1)

The contribution made by a Government Sector Contributor (salaried) and a Non-Government Sector Contributor is described in Section 80CCD (1) of Section 80C. These contributions add up to 1.5 lakh INR. Salaried workers may deduct up to 10% of their salaries, while self-employed people may deduct up to 20% of their gross income.

Section 80CCD (1B)

Accompanying deduction of INR 50,000 for any additional self-contributions above Section 80CCD. Both salaried and self-employed individuals are subject to it and can avail of the benefit.

Section 80CCD (2)

Government and non-government employers’ contributions on behalf of their staff. A person may deduct the most is either the employer’s NPS contribution or 10% of their base salary plus Dearness Allowance (DA). Self-employed people are not eligible for this benefit.

Types of NPS account

  1. Tier I
  • Each person must open the fundamental, required account to participate in the NPS scheme.
  • The entire amount cannot be withdrawn before age 60, but under certain circumstances, you may withdraw up to 25% of the invested amount three times in a five-year period.
  • You must open the account with at least INR 500, and there is a fee of INR 1000 per year.
  • It is eligible for tax deductions of up to Rs. 1.5 lakh annually under Section 80C and an additional sum of up to Rs. 50,000 annually under Section 80CCD (1B).
  • Sixty years of age allows for the tax-free withdrawal of 60% of the corpus.
  • Annuities may be purchased with the remaining 40% of the maturity amount. It is possible to use the annuity’s interest as a pension, but it is taxed.
  1. Tier II
  • The account is for retirement savings.
  • Only those with active Tier I accounts are eligible to open it.
  • Anytime is a good time to withdraw the money.
  • After a three-year lock-in period, government workers are eligible to claim tax exemptions, but contributions are not tax deductible for the public.

Tier 2 vs Tier 1 NPS

Conclusion

It can be daunting to guesstimate the precise amount you’ll need to live comfortably during your retirement years. You can create the ideal retirement corpus that satisfies your financial needs by using NPS as a core retirement savings plan with some assets and supplementing it with other low-risk schemes that offer good returns and flexible liquidity.

Lessons from the IPO of new-age technology companies

The recent stock price performance of some of the hottest Indian technology companies have left investors bewildered. While it didn’t come across as a surprise to the more seasoned market participants, it served as a rude awakening call to the rest. 

Let’s try and understand how we got to this and what are the 5 lessons from the IPO of these companies we can draw. 

How We Got Here:

The Indian start-up ecosystem is still in its early days and nascent compared to its counterparts in the US and China. The industry has grown significantly over the past decade however it has still been a challenge to produce self-sustainable companies. Most of these firms have bankrolled their growth on the back of a nearly endless funding flow from the VCs. This has also been due to the fact they had been forced to tap the private markets for their capital requirements as the Indian public markets and the market regulator remained sceptical of loss-making firms.

However, come 2020 and all of that changed. With increasing free time on hand, investors took to investing as a national pass-time. Couple that with brilliant FOMO-led marketing with headlines like ‘How 2020 is going to be a watershed moment for the Indian technology industry’ – and you have got the perfect recipe to create the hype that these IPOs need.

Where Are We Now:

2021 saw the listing of 5 such notable technology companies i.e. Zomato, Nykaa, Paytm, Policy Bazaar, Cartrade. The table below shows their YTD performance –

Sl. No.

Name of the firm

Price (as on 1/1/2022)

Current Market Price (as on 17/3/2022)

Gains / Loss (in %)

1.

Zomato

137

80

-42%

2.

Nykaa

2,101

1,517

-27%

3.

Paytm

1,334

597

-55%

4.

Policy Bazaar

950

745

-20%

5.

Cartrade

848

571

-32%

 

5 lessons from IPO of these companies:

a. It’s never a good practice to fall for hype: A lot of the investing apps have gamified the entire IPO process. It always helps to look beyond these gimmicks and one-off marketing fervors and think independently about such events.

b. Do your own research and diligence: All the companies release a Draft Red Herring Prospectus (‘DRHP’) in a SEBI-prescribed format prior to their IPO. The DRHP contains vital information about the company, its future prospects, operations etc. It is a cumbersomely long document that most investors often tend to overlook – however, going through it in detail can help you uncover important details about the company.

c. Look for the Offer-for-Sale component in the IPO: Offer-for-Sale (‘OFS’) is a practice through which existing shareholders of the firm offload their stake in an IPO. A higher OFS component is usually a negative sign as this implies that the promoters/investors are merely looking to IPO to cash-in on their own holdings.

d. There is no get-rich-quick scheme in the markets: It may be tempting to think of IPOs as an opportunity to make some quick buck – yet that is rarely the case. As these IPOs have demonstrated, in the fullness of time the companies tend to trade closer to their intrinsic value.

e. IPOs are indeed blind bets: Your friend or the Sharma-ji uncle may have scooped up some gains by playing the listing day game i.e. buying and selling on listing day at a premium. However, that does not mean that he/she will be able to do that repeatedly. Since 2007, 456 companies have conducted IPOs on the Indian bourses. Of these, 125 opened lower compared to the issue price, while 29 of them opened flat. Among the remaining which opened higher, 117 opened only with gains of up to 10% [1].

It may be a truism but time in the market > timing the market. The earlier we learn that, the better investing experience we will have. We know that feeling when we see someone we know make quick and easy money – however, that is transient. It’s important to not fall for the supposed gold-rush in investing because unfortunately there is none. The upcoming LIC IPO will also be a test-case to determine whether the retail participation gets affected by these recent debacles.  

If you are all too overwhelmed with all this and need a guiding hand, we are here to help. Daulat offers low-cost, fully-managed and diversified multi-asset model portfolios that can help you achieve your financial goals. We implement these using a combination of active and passive mutual funds/ETFs. 

Speak to one of our wealth experts today! 

References: [1] Capitalmind Research

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Restrictions On Foreign Investments

Securities and Exchange Board of India (SEBI) has put restrictions on foreign investments by mutual funds. Thereafter, the industry body, Association of Mutual Funds in India decided to set a value threshold for all such investments.

Recent developments

– The Association of Mutual Funds (AMFI) has asked asset management firms not to invest in overseas securities.

– As per new RBI guidelines, mutual funds registered with SEBI (Securities and Exchange Board of India) can no longer invest overseas. The overall cap is set at $7 billion. This cap has already been reached, and hence further foreign investments either through fresh lump-sum or SIPs have been paused.

– Investments in exchange-traded funds have a separate cap of $1 billion which is not affected by these restrictions on foreign investments.

Repercussions

– PPFAS Mutual Fund had previously suspended accepting inflows into PPFAS Flexicap Fund, which invests up to 35% of its corpus in international equities, mostly US technology stocks. However, since 15th March 2022 it has started accepting fresh subscriptions due to the lack of clarity on when such restrictions on foreign investments would be lifted.

— Even DSP Investment Managers have switched from underlying funds to exchange-traded funds in its DSP Global Innovation Fund of Funds (ETFs).

— A volatile market is usually a good time to increase one’s exposure. Despite this, we believe that investors should rarely look for opportunities to time the market and instead continue to invest in a disciplined manner via a SIP.

How to invest overseas then?

Meanwhile, investors looking for other means to invest in overseas equities can take advantage of the RBI’s Liberalized Remittance System (‘LRS’). Under the LRS, resident Indians can remit up to $250,000 each fiscal year toward acquiring international securities and funds denominated in foreign currency. This cap is separate from SEBI’s existing maximum of $7 billion for Indian mutual funds.

Indian investors have recently become more aware of the importance of diversification by investing in the international market. While direct stocks and ETFs are available, we hope that the regulator will raise the limits so that the route to investing through mutual funds remains open. Investors have plenty of options to diversify globally and build a sustainable portfolio for long-term wealth creation.

This is where Daulat can help you. Our fully-managed, low-cost, and diversified model portfolios — DMAS — invest across asset classes, geographies, and styles to generate higher risk-adjusted returns.

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5 Rules of Money to Stay Financially Fit

We, as humans, can abide by a set of logic and follow the rules. We try to put rules in every situation we can imagine. We try to stay physically healthy by working out consistently. We try to make a regime of an active day to follow our hobbies and make time for activities. Making rules help us to stay ahead in our game while keeping us consistent. Yet, we do not give equal importance to our financial health. 

Thus, it is equally necessary that we follow some rules to stay financially fit. Financial fitness means we always have a plan to get out of any distressing situation without getting ourselves into debt. It’s a way of maintaining financial freedom by growing even in the face of adversities. This also helps us keep a tab on our earnings, expenses, savings, and investments. We will manage our finances a little more reliable when we have set rules for all our decisions.

Here we try to define a few rules of money that can help you challenge yourself into falling consistent. We believe it will make your financial planning efficient and make you financially smart and prudent.

1. Gaining a deeper understanding of your own investing style

There are a plethora of investment options available for an investor to dive in. With those options come the different types of investors too. Some are the people who go for short-term investments, while some play for the long haul. There are spectators, intra-day traders, short-term and long-term investors, and the list continue. The aim behind every investment isn’t the same. Everyone has different expectations of rates of return, the ability to take different levels of risk, and a very subjective approach to investments.

Let us call an example of a company X. Now the growth seen in the shares of that company in the past 10 years was over 200%. If you are a long-term investor, then all that matters to you is the long-term returns you will get with the growth of the company’s shares. But if you are an everyday trader, you will be concerned if the company’s shares fall by even 0.5% on that day. You won’t get bothered by how the company will perform in the long run if your concern is everyday performance.
Hence, one must understand his/her investing style and grow by sticking to that process.

2. Expanding the horizons of time for investment

Albert Einstein quoted, “Compound interest is the eighth wonder of the world. He, who understands it, earns it. He, who doesn’t understand it, pays it.”

The sooner one starts investing, the greater profits one can see from compounding. The power of compounding lies in time. Warren Buffet is famously quoted as one of the best investors the world has ever seen. The secret of his status lies in the age at which he started investing. Not always is it the good investments that lead to higher returns. What makes a good investment great is time. Once you learn that, you start your compounding journey.

investment strategy

3. Risk and returns go hand in hand

Higher the risk, the higher the rewards. This has been a famous saying which undoubtedly is held. An investment like fixed deposits is the safest investment with minimum risk, but they hardly lead to good returns. These investments barely even beat inflation. When investments are made, it is essential to beat inflation. Thus, options like equities and mutual funds are really necessary to grow.

Too much of anything isn’t a good idea. Thus you must understand the risk you are taking. Always consider the loss that may occur and if you are okay with taking that loss. Only then should you consider that investment.

4. Investment should never be based on debt

Sometimes, out of competition, people tend to take loans or debts to invest. This is not at all recommended. It may seem tempting but involves high risks. The market is highly sensitive, and you cannot predict anything with a hundred percent surety. In a worst-case scenario, you borrow some money to invest in high-performing stocks. In a few days, you observed a substantial reduction in the share prices, leading to a loss. Huge losses in the stock market can take up to 5-7 years to make up for it. Thus borrowing money in this unpredictable situation must be avoided to lessen the risks involved.

5. Invest in yourself and trust your abilities​

While investment is about experience, it is also about gaining knowledge. One must identify the threats and potential of the assets they feel interested in. Give yourself time and educate yourself about the investment options and industries. There are all kinds of chaos in the world of investment markets. Make sure you try to listen to the voice that leads you to the good path. Decrease the noise and take educated as well as informed decisions. Do not get influenced by the loudest cheer, instead research to identify the assets with potential.
Stick to the basic principles of investing, which will pave your way for future challenges.

Summary

Now that we have discussed some of the rules of money that can help you stay in the game of finances, we believe you will invest more attentively. Staying financially fit not only increases your income but also helps you grow in other aspects of life, stress-free.

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What Should You Do In The Current Volatile Market? Hold On and Keep Investing

In today’s extremely volatile stock market, it can be a bit nerve-wracking to see your portfolio in red. After all, you had invested all this hard-earned money with an expectation that it’d eventually rise by the time you’d need it. Eventually. So, what happens in the interim shouldn’t really matter. Unfortunately, as humans, we are wired to make decisions based on short-term events. And therefore, inadvertently, we usually end up acting in haste – hoping that our active and continuous participation in the markets by buying/selling securities will either help in maximizing our returns or minimizing our losses.

No matter what you hear on the TV/Media from so-called ‘stock experts’ about when is a good time to enter/exit the market – it is nearly impossible to time the market accurately and consistently. The best advice is often to invest in a disciplined manner and stay put until your goals are achieved. Obviously, that does not mean that you stay invested in a stock/fund which has poor prospects or its underlying story has fundamentally changed – but that has more to do with security/fund selection criteria than market timing.

In this post, we will take an example of 2 different market scenarios to illustrate how you can make time work in your favour by investing and holding on to your investments in a volatile market (like the current one):

1. Investing in a steadily rising market

1. Investing in a steadily rising market
Strategy Risking

2. Investing in an increasing but volatile stock market

Erosion control matting
Volatile market

Final Results

As you can see in the graph below, investing in a volatile market leads to a higher value at the end of the 8th year. This is because one can purchase these investments at a relative discount due to the market volatility. If you are investing for the long-term (5 years and above), you can view the temporary downturn as an opportunity to purchase more for less (who doesn’t like that!).

Final investment Value

Take advantage of the volatile stock market

The point we are trying to make here is that one can almost always be sure of generating a good return by simply staying invested in the market for the given duration of their goal – despite its ups/downs. And see short-term downturns as an opportunity to double down on your most high-conviction portfolios.

And do not forget the benefits of diversification

These periods are also a good time to truly see the importance of diversification — or spreading your investments across a range of asset classes i.e. equities, fixed income, international equities, and style i.e. large-cap, mid-cap, and growth. This ensures that you are not heavily concentrated on a single sector, company, or geography.

A study of the stock markets has shown that in the long term, it generally rises over time. A notional loss in the portfolio value can make you uncomfortable – but remember that loss is just on paper. You do not actually make a loss until you sell it for less than what you purchased it for. Do not take decisions based on what your friends/family are doing. And most importantly, do not hesitate to take professional help if required.

We hope that the post provided a good framework for contextualizing and thinking through the current market environment. Remember, it’s a blip! Enjoy the journey.

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Indian Investors Perceptions – From Local to Global

The willingness of Indian investors to geographically diversify their portfolios and seriously consider foreign portfolio investments (FPI) is a relatively new shift in perspective. As an emerging market, it certainly offers stupendous investment opportunities, particularly after the subprime mortgage crisis of 2007-08. However, many factors have contributed to the changing perspective of Indian investors.

The pandemic left everyone across the globe in a lurch. Financial markets were no exception. The global economy collectively suffered heavy losses, particularly during the first few months of 2020. While all the markets fell, some were left worse off than others. This brought into perspective the importance of geographical diversification.

One way to manage your investment portfolio and mitigate its risk profile is to diversify your capital allocation. You’re essentially avoiding putting all your eggs in one basket with diversification. There are many ways to diversify your portfolio, such as

1. Across assets, i.e., allocating investment capital to various asset classes, for example, real estate, shares, collectibles, commodities, etc.
2. Within assets, i.e., diversified allocation of investment capital in the same asset class. For example, when you invest in the stock market, you could invest in companies from different industries; within the same industry, you may allocate different percentages of your capital to various companies.
3. Different types of investors employ different investment strategies or a combination thereof. Popular approaches include rupee-cost averaging, index investing, value investing, buy and hold, etc.
4. By investing in markets other than your native country, you can diversify your portfolio geographically.

Due to accelerated globalization over the past couple of decades, all economies are now intricately connected. The interdependence is especially apparent in how many MNCs that have succeeded in local markets have expanded their operations in other countries to reap the benefits of lesser cost of operations. This is called outward direct investment. It is a type of cross-border investment that has become increasingly commonplace.

Another type of cross-border investment is inward investing, aka foreign direct investment (FDI). Companies make significant investments in a foreign market or company using mergers, acquisitions, joint ventures, etc., in the target country. India and China as emerging markets have been beneficiaries of many FDIs.

Another business strategy many companies employ is cross-border listing. This is when a company lists its shares on a stock exchange other than its native stock exchange. For example, an Indian company listed on NSE or BSE can list its shares on NYSE, provided it meets the required criteria.

Changing Indian Investors

But it’s not just companies and other institutions that are exploring the option to widen their investment opportunities. A further result of globalization is the free flow of goods and services. Some companies, such as Apple, Microsoft, Facebook (Meta), Netflix, Amazon, Google, Samsung, etc., have become a staple in our daily lives. It isn’t surprising that individuals are willing to invest in lead innovators like these. After all, who wouldn’t want to be at the front of pioneering technology?

We must account for a couple more factors when discussing Indian investors’ changing outlook regarding global investments. Ten years ago, the skepticism about foreign investments was entirely justified. One of the biggest reasons was inaccessible paths to making the investments. The inaccessibility was due to high brokerage, taxation structures, significant initial capital owing to unfavorable conversion rates, etc.

While some risks such as inflation and unfavorable conversion rates remain, many other barriers are brought down. A lot of the equity mutual funds in India now have exposure to fast-growing, technology companies in the US. In fact, there have been various ETFs and Fund-of-Funds which have been launched in the past few years and track the US indices.

After the initial fall of markets at the beginning of the Covid-19 pandemic, the more developed markets such as the US have stabilized. In contrast, the more significant fluctuations in the Indian market significantly affect the value of investments and how Indian investors react towards them. Additionally, if we compare the performance of the US market to that of India over the last decade or so, the former has outperformed the latter by leaps.

While developing economies like India provide more options for investment, developed ones such as the US, with prudent decisions, can provide greater returns. Given the circumstances, it is obvious why many successful Indian investors have now overcome their bias and skepticism and are looking to invest abroad.

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6 Ways to Reduce Investment Risks

Investing is a tried and trusted method to build wealth. To ensure high returns on your investment, you should be able to assess your investment portfolio’s risk tolerance capacity correctly. There is evidence to show that strategic and disciplined investors have reduced portfolio risks and have been greatly rewarded for their patience without relying on investment risk management tools.

While as an investor, there is no way to avoid portfolio risks altogether. There are many ways to mitigate investment risks. Here is a list of strategies you can utilize to reduce investments risks achieve a favourable risk-reward proportion.

6 Ways to Reduce Investment Risks-

1. Determine your risk tolerance :

Your risk tolerance refers to the capital you can afford to lose. Risk tolerance is determined based on the financial obligations and your capacity to recover potential losses.

The higher your tolerance for risk, the more aggressive wealth creative strategy you can adopt. Whereas if your risk tolerance is lower, the focal point should be preserving your wealth.

A rule of thumb is that older investors have lower risk tolerance than their younger counterparts. This might, of course, not hold in every instance.

Take our Free Risk Assessment test to establish your own risk tolerance.

2. Portfolio Diversification :

One strategy to minimize investment risk is simultaneously employing portfolio diversification and asset allocation.

Portfolio diversification involves distributing your investment capital across different asset classes. Standard asset classes are equities, fixed income and cash. Investing across asset classes increases your channels of returns and thus can lead to higher overall returns. Additionally, each asset class has its own risk and reward profile, and some may even be unrelated. Therefore, when one class underperforms, some others may do well and still generate rewards, reducing the risk of heavy losses. A simple trick is to invest in assets with little/no correlation to have a truly diversified portfolio.

Another way to enlarge your portfolio is to invest in the markets of different countries. Geographical diversification secures your assets against the fluctuations of one market by possibly generating returns in the other market.

3. Asset Allocation :

Asset allocation refers to the capital you assign to the different types of investments you have made. For example, suppose you start with ₹ 20,000 and plan to create five other investments. In that case, you can distribute your capital in various proportions, such as 20% per investment ₹ 4,000 per investment. Or you may assign 60% to one investment, i.e., ₹12,000, and distribute the remaining ₹ 8,000 equally. So on and so forth. An important thing to note here is that simply allocating your capital equally across different investments is NOT asset allocation. One needs to keep in mind how these asset classes interact with each other to determine the optimal allocation.

If your risk capacity is low, the advice is to build a conservative investment portfolio. It means that you must exercise conservative asset allocation by primarily investing in low-risk assets such as bonds and cash. This ensures that your principal amount is preserved.

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4. Retain as much liquidity as possible :

Liquidity refers to the ease with which you can cash out your investments. The more liquid your assets are, the easier it will be to redeem them. In case of emergencies, be it personal or a result of market fluctuations, liquidity can be a lifesaver.

Another way to secure liquidity is to set up an emergency cash fund. Ideally, only start investing once you have an easily accessible and sufficiently large cash fund.

5. Rupee-cost averaging method :

It is near impossible to determine when the right time to start investing is. One of the best ways to avoid time-related confusion is utilizing the rupee-cost averaging method. The rupee-cost averaging process employs a Systematic Investment Plan (SIP). The point is to invest a specific amount at regular intervals irrespective of the fluctuations in the market. This strategy guarantees that you accumulate more units of an asset when the price is low and few units when the price is high. At the end of the investment period, the average cost of the accrued units is lowered. It also increases your net profit.

This strategy is commonly used when investing in mutual funds.

6. Monitor your investments :

Every smart investor knows that investment is not a one-and-done event. You need to keep track of how your investments are performing regularly. In the case of long-term investments, we’d suggest making reports bi-annually at least. A monthly report would be wise since duration-related risks and volatility are high for short-term investments. On many occasions, you might need to modify your investments and strategies. Whereas, on certain others, you’re going to have to wait for a while to evaluate the effectiveness of the strategy you have used.

The above-listed methods are the most essential and standard practices to reduce investment associated risks. Some other strategies are Risk Diversification, where you can manage risks by spreading your money. If you want to create and multiply your wealth, some risk-taking is inevitable. But you can ensure that these are calculated risks and not just gambles. Employment of a combination of investment strategies can help minimize the risk profile of your portfolio. It is all about customization.

We can help you tailor your investment portfolio based on your financial goals and appetite for risks. Feel free to reach out!

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Deadly Mistakes by Investors

Common Deadly Mistakes by Investors

Beginners’ are often left paralyzed by the choices and suggestions they encounter when they dip their toes into the world of investment. It is easy to get lost in the jargon and the numbers. While there are many people out there who are ready to offer some anecdotal counsel, it is always safer and wiser to revert to advice from experts who have studied the market.

We have compiled a list of common deadly mistakes by investors that you can use as a troubleshooting checklist or a crash course in investment tips.

1. Do your research: We cannot stress it enough. Once you have your financial goal figured out, the next step is to spend time learning about the various asset classes. It would be best if you also learn how investing works for each asset class to know your options. Think of it as investor education so that you can make informed choices. You cannot rely on sheer luck or anecdotal investment advice to make your decisions. This is the mistake many novices make, resulting in grave errors and heavy losses.

2. Learn about asset allocation: ​There are different classes of assets you can invest in. Traditional investment categories include stocks, bonds, and cash. There are multiple classes of assets that are deemed as alternative investments. Alternative investment options are not new to the investment scene. Still, they are considered so because they tend to behave differently from traditional asset classes when the market shifts. Alternative investments include private debt, private equity, real estate, hedge funds, collectibles, commodities (e.g., oil, natural gas, etc).

Prudent asset allocation in your portfolio is key to achieving your investment goals. This is because asset allocation is a strategy that aims to balance the risks and the rewards in your investment portfolio by diversifying your investments horizontally across various asset classes. You can then decide how you want to dispense your money across multiple categories based on your risk profile. For example, if your risk tolerance is higher, you might allocate a large chunk in equity. On the other hand, someone with a lower risk profile might choose fixed-income instruments such as bonds. Portfolio allocation will also depend on whether you’re looking to invest in the short term or long term.

Blog image Women watering money plant

3. Diversify your portfolio: ​One of the most significant investment mistakes you can make is accruing investments with the same risk profile. Many investors invest in only one asset class, for example, stocks. Furthermore, even within an asset group, you can further diversify by investing in different industries. When you’re trying to diversify your portfolio, make sure that you include dissimilar or even opposing investments. This kind of variance ensures that your sources of returns do not correlate and remain independent.

The benefit of diversification is that it lowers the risk profile of your portfolio and provides the possibility of increasing the risk-adjusted returns. Having a variety of independent sources of return ensures that when movement in the market negatively affects one asset class or a specific industry, the rest of your assets remain steady. Some might even result in inverse returns, i.e., generate higher rewards while certain other investments aren’t doing well.

4. Consistency: Anyone serious about investing must realize that it is a strategic practice that requires consistent and regimented implementation. If you’re looking for quick returns and making random investments, especially when the market is high, you are essentially gambling and not investing. This is one of the worst investing mistakes you can make.

If you’re looking to build wealth, the one thing you should not skip on is creating a strategy based on your financial objectives. Once you have the plan in place, it is essential to be regular and disciplined in its enforcement. Be sure to periodically review the performance of your investments and update your strategy to best suit your requirements.

Blog image

6. Liquidity: Another key to investment risk management is to avoid low liquidity. Liquidity refers to the ease with which you can convert your investment to cash. If there are numerous barriers, your investment is illiquid. Life and the financial market can both be equally unpredictable. You should be able to quickly liquidate your money, be it in cases of emergencies or to cut your losses. You can do that only if the investments you make are highly liquid.

7. Emotions: Do not act on your emotions. Greed and fear can be immensely motivating. But to act based on emotions rather than reviewing the market situation is one of the worst valuation mistakes you can make.

8. Patience: Patient investors have reaped immense rewards. Long-term investment portfolios have been known to provide sizable returns. It is thus essential for you to stick to your strategy and avoid making any irrational decisions because you’re getting impatient.

9. Personal Finance: You must learn to manage personal finances well. It is not helpful to invest if you don’t have the money to. The best way to do it is by implementing strict budgeting. Get your spending habits on track, avoid credit card debts and personal loans. Think of other areas you need to invest in, for example, health insurance. Overspending on things whose value depreciates with time makes no sense. So be careful.

10. Expert advice vs. DIY: Not everyone has the capacity and resources to figure out the behemoth task that investing can be. And this is completely alright! You can always reach out to the experts in the industry who can help you. Even so, you will have to develop a working knowledge of investment. Reports show that investors who work with experts have increased returns and a clear vision and peace of mind. Browse your options to find the right fit for yourself. On the flip side, if you want to do it yourself, the resources you invest in your financial education will pay lifelong dividends. Investing in yourself is never the wrong choice.

To sum it up

These are common mistakes people make when investing. It is always a plus to have a stash of investment lessons to lead you through your journey. So long as you keep these in mind, investing can be fun; after all, making money will always be a delightful process.

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