7 Common Investing Mistakes to Avoid

Each one of us have made a few common investing mistakes. We learn from them and grow, hoping to be better in the coming future and making wiser decisions that can make our lives easier. While we do that, it is much better to learn from other people’s mistakes rather than having to go through the pain ourselves. Below are a few common mistakes people make with their money;

Investing Mistakes to Avoid

Choosing traditional insurance

Choosing traditional insurance linked investments products in the name of disciplined investing. People think that investing in a endowment linked plan for the child’s education goal will help them accumulate a big corpus in future and also enforce disciplined investing. People fail to understand that these products yield very low returns in the range of 4–6% and it will be very difficult for them to meet education inflation of around 10–15% a year when their child grows up. Let’s look a difference between a 6% return and 10% return for a 20 year period.

Monthly Investments Equity Mutual Funds Traditional Insurance
₹ 10,000 ₹ 91,98,574 ₹ 45,56,458
₹ 15,000 ₹ 1,37,97,860 ₹ 68,34,687
₹ 20,000 ₹ 1,83,97,147 ₹ 91,12,915

Increasing Loan Tenure for lower EMIs 

Increasing Loan Tenure for lower EMIs while opting for home loans to ensure that you can manage or lower the stress on your cash flows can have large impact in the long run. Since you will end up paying interest for a longer tenure, the total interest cost will be significantly higher. For instance, on a ₹ 75 Lakh loan at 8% interest, the total interest cost for 15 years would be ₹ 51.84 lakhs compared to ₹ 94.51 lakhs as interest cost if the loan is for a 25 year tenure. That’s a 100% increase in interest cost.

Not Understanding Taxation

Investing only in Fixed Income instruments like Bank FDs, RDs and others are subjected to taxation. Those in the higher tax bracket are impacted the most, with 30% or more lost in the form of taxes. Over the years, this can lead to significant loss in returns. For debt portion of your portfolio, it is suggested that one explores debt funds like liquid and ultra short funds where the capital gains get indexation benefits and returns are taxed at 20% rate.

No or Inadequate Insurance 

Insurance is sadly treated as a tax savings or an investment instrument. In its true sense, insurance is neither of them. Insurance should be treated as a pure risk mitigation tool. For Life cover, one should have a term cover that is at least equivalent to 10 – 15 times their annual income. When it comes to Health Insurance, choosing the lowest premium cover might not be the best option. One should understand what the sub-limits, claims settlement ratio, deductibles and other important features while selecting a Health Insurance cover.

Panicking during market corrections 

Most investors need to upgrade their emotional behaviour towards market volatility and ensure that they stay invested during turbulent times. If you were like many investors who panicked when the market corrected by more than 35% in March 2020 due to Covid ’19 crisis, you would be disappointed to know that the market recovered more than 40% of the losses by June 2020. There is huge cost to not staying invested. Read here to understand what happens when to invest during a stock market crash.

Improper Use of Credit Cards 

Credit cards are a excellent tool to earn rewards points and get preferential benefits reserved for a select few. Using them right can entail you entry into exclusive discount clubs and offer access to features not availing for general public. If not used properly, they can backfire very badly and dent your financials in the long run. Credit card debts carry high interest rates varying from 24% to 48% per year, high penalty charges for late payment and other hidden charges. Use credit card to earn points and benefits only to the extant of money you have in your bank account.

Taking Random Advice

The most common investing mistake is that most investors fail the understand the benefits of approaching a fee only financial planner to help them with a financial plan. They end up taking random tips from their friends and family members who are not competent/qualified to provide financial advice. They fail to understand that SEBI Registered Investment Advisers follow a process for financial planning which involves, risk profiling, asset allocation, contingency planning and other measures that ensure that an individual’s preferences and priorities are given most importance.

Humans are smart beings and learning from other’s mistakes ensures that we do not have to go through the same pain. We can protect our finances and work towards building a better financial future for ourselves.

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