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To protect your money box in 2020, here are 8 financial mistakes you should avoid.
One must have a clear goal before starting to invest. What are your goals? How many years away is the goal. How much is to be invested in which assets to reach the goal in the given timeframe. These are the questions you must answer before starting investing. Once you have a goal and an asset allocation in place, the difficult part of the job is done. The easier part is to find which products to invest.
We all take it for granted that by the first of every month we will get the salary to splurge on. Before you start investing, the first thing to be done is to create an emergency fund which should be a minimum of 6 months expenses that include the EMIs if you have a loan. If you are in a business where your income is not regular, it is recommended to have an emergency fund of 1 year’s expenses.
A retail investor should never time the market; we typically do not have the wherewithal to do it. For small investors, equity should be seen as a long term investment; time in the market is more important than timing the market. So, invest via mutual fund schemes and do not let violent swings or volatility phase you. Invest with your financial goal in mind instead.
Often while making an investment decision, a young person might end up considering only one aspect, say past returns. Such an approach can invite trouble. A thorough understanding of a company’s balance sheets or its business and operations or the behavior of a product is a must. One should invest according to a carefully thought out plan and should not simply chase momentum or a favorite hot theme or sector.
Savings done earlier in working life has a longer time to stay invested and get the magical effect of compounding. If you take a loan and use most of your earning to pay the EMI, then the savings will get reduced. The only good loan will be one to buy an asset like a house or a flat. Even if this kind of asset purchase, it is better to postpone it to a stage in life when you are sure to stay in the same location for at least five years. Otherwise, renting a house is an easy and flexible option. You are not tied to the job or the city.
Fixed income instruments are considered to be safer investments as returns from these are less volatile than those on say equity. However, there are certain risks that even these fixed income instruments face, one of them being inflation, which will dilute the real value of your investments in hand. This is also one of the reasons that financial planners advocate portfolio diversification. You need all types of investment instruments to be able to stand strong and steady in the face of financial volatility/ contingencies.
For mutual fund investors, a fund’s past track record plays a critical role when it comes to deciding on investing in it or continuing with a particular scheme. It shows whether the fund manager has been consistent in executing a particular strategy with good results.
However, do not look at past performance of a mutual fund scheme in isolation. Select scheme based on fund managers objectives, asset Management Company’s track record and taxation.
A lot of people from the younger generation venture into the equity markets believing that it is the place to make quick bucks earn swift returns and get rich overnight. But the reality is way different. You may occasionally see short-term profits, but may also end up losing large sums within a short term when the market turns volatile. Keep in mind that equity is a long-term avenue, and not short one.
Getting insured does not mean you have invested too; these two products are completely different. Do not make the mistake of perceiving them as interchangeable and mixing them up, they are apples and oranges. The objectives of investment and insurance are different, while the former is a corpus-building, goal-oriented activity; the latter is a form of protection against medical contingencies and the possibility of dying before you have fulfilled your financial responsibilities.
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