Avoid these common mistakes

    Most retail investors plan to grow their savings via investments, but most of them fail to grow the investments to their full potential. You can blame this on the common mistakes that retail investors make during the investment period. Here are some of them: 

t Lack of planning: Investments are made indiscriminately across asset classes, overlooking the investment objective or risk appetite. A strong investment or financial plan addresses the goals or objectives to be achieved after a specific period of time. Here, if one is not well-versed with the nuances of financial planning, he/she should consult a financial planner. 
t Lack of diversification: Often, investors put money only in one asset class, thereby losing the opportunity to benefit from better performing asset classes. For instance, in India, portfolios of most retail investors are locked in bank fixed deposits (FDs) instead of having a mix of mutual funds and FDs. The table here shows a diversified mutual fund portfolio of equity, debt and gold that provides higher returns than bank FDs over a 10-year period. 
t Impact of inflation: Investors often ignore the effect of rising prices or inflation on their portfolio. This is especially important in a highgrowth and high-inflation economy such as India. For instance, if a bank FD gives 8% returns in a year when the inflation rate is 7% (average), the real rate of return for the investor is just 1% (8%-7%), which is insignificant. Investors can beat inflation only by investing in diversified products across the asset class spectrum. 
t Not starting early: The adage 'early bird catches the worm' holds true in case of investing also. If a person starts investing early, he/she will be able to reap the benefits of compounding of returns to the maximum. For instance, Rs 1 lakh invested at the age of 35 years at the rate 10% per annum would grow to Rs 6.73 lakh in 20 years (55 years). However, the same amount if invested at the age of 25 at the same rate of interest would have grown to Rs 17.45 lakh. This is three times the growth seen from the money invested 10 years later. This is nothing but the power of compounding, which works to the advantage of those who start saving early. 
t Timing the market: Financial markets tend to move in cycles — equities have a far shorter cycle compared to debt or other asset classes. A big mistake that investors make, especially in equities, is trying to time the market. However, the risk of loss is very high if calculations go wrong. 
t Investments based on tax planning: As the financial year-end draws near, tax benefits overshadow pragmatic investment needs. Investors do not invest based on any goal or plan but only to save on tax. Investors must align their tax-saving investments according to their long-term investment plan. For instance, for young and relatively risk-averse investors, equity-linked savings schemes are a better alternative than debt instruments as equities have outperformed debt over the long term. 
t Lack of review and rebalancing: Retail investors fail to review and rebalance their portfolios. They should track their investments at regular intervals to gauge the performance. Further, portfolios must be rebalanced to match the pre-defined asset allocation. Reviewing also helps to weed out non-performers in the portfolio. 
t Lack of insurance: Insurance, both life and medical/health, should be an integral part of an investor's financial planning. This is because exigencies come unannounced and could be costly. A term plan may be preferred to an endowment or a money-back plan. 
What are behavioural biases of retail investors? Swatantra Kumar explains: Behavioural biases are the typical traits that are observed among investors. They are not always based on sound logic and often lead to overreaction in terms of their investment decisions. One of the most common investor biases is called the disposition effect where investors hold on to those stocks that are losers in the hope of future returns, while selling off the winners quickly. The other common behavioural bias is the overconfidence about their portfolio. 
MYTH BUSTER 
MYTH | Most investors think they can manage their portfolios better than fund managers 
REALITY | Research shows that such behaviour is based on overconfidence and lack of knowledge on the part of investors. A recent study on retail investors' behaviour pointed out that, on average, each active investor loses about Rs 83,000 a year because of their disposition biases. Investment decisions by most retail investors are driven by their feelings about profit and loss, rather than careful calculations, while fund managers are able to make rational decisions. 
The author is director, funds & fixed income research, Crisil Research