Investing is an art and unless you learn to master the art properly, your investments might leak money rather than accumulating it into a corpus that you need.
So, here are 9 tips on how not to lose money by investing right –
- 1) First, Identify Your Goals, Always!
- 2) Risk Profiling
- 3) Tax Planning
- 4) Know When to Hold and When to Redeem
- 5) Invest When the Market is Down
- 6) Create a Diversified Financial Portfolio
- 7) Factor in Inflation
- 8) Review Your Financial Portfolio, Regularly
- 9) Learn, Learn, Learn
1) First, Identify Your Goals, Always!
What is the basis of your investment? Creation of funds for your financial goals, isn’t it? So, start at your goals first. It is useless planning a journey anyways without having a destination in mind.
So, jot down your financial goals, both short-term and long-term. This listing would give you two distinct benefits – it would help you find out the corpus needed for each goal as well as the time horizon.
These two inputs form the basis of your financial plan and so, knowing your goals is the groundwork that you need to do before you jump on the investment bandwagon.
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2) Risk Profiling
The next thing to find out is your risk appetite. Risk appetite means your capacity of taking risks. Depending on your risk appetite the investment avenues would be selected.
If you don’t mind taking risks, you can invest in equity-oriented avenues and if you are risk-averse, fixed income avenues would be better.
Risk profiling should assess your tendency to bear risk vis-à-vis your age. Nobody like losing money and so, risky avenues are always seen with a bit of hesitation.
However, if given time, risks tend to smoothen out and you can get very good returns from risky investment avenues, i.e. equity. So, even if you are risk-averse, you can invest in equity provided – age is on your side and you have a long term investment horizon.
When you are young, you can give your investments time, time which minimizes the inherent risk. So, equity is suitable for long term goals. Do not lose your money by investing in the promise of equity for a quick buck.
Equity is highly volatile and while it can give quick gains, it can result in capital erosion too.
3) Tax Planning
Many of you also lose out on your returns because you don’t plan your taxes properly. Remember every investment avenue has its own tax implication.
If you understand such implication and then plan your investments around them, you would be able to save tax and generate good post-tax returns.
So, tax planning is essential, both when investing as well as on redemption. Find out which avenues help you save tax on investment so that you can reduce your taxable income while saving (Section 80C should be understood properly).
Then, when you redeem, check how your gains would be taxed and if you could do anything to avoid or reduce the possible taxation. A very common example is redeeming equity mutual funds.
If you redeem your investments within a year, a short term capital gains tax of 15% would apply on the returns that you have earned. On the other hand, if you redeem them after a year, you would be able to save tax if your returns are within Rs.1 lakh.
Even if your returns are greater than Rs.1 lakh, only the excess return would be taxed, and that too at 10%. So, if you are redeeming your mutual fund investments, check for the tax implication to see if you can save tax.
Losing money is not only through negative returns but also by not planning your taxes efficiently and letting them eat into your returns.
4) Know When to Hold and When to Redeem
This is a very technical aspect, especially when investing in equity stocks or equity mutual funds. Balancing between holding and redeeming is a fine line, one that you should toe with careful consideration.
If you hold your investments and the market falls further, you would lose money. On the other hand, if you redeem or switch and then the market rises, you would lose again as you could have earned better profits.
So, this is a tightrope and many investors fall flat while trying to walk it.
Wondering what you should do? Well, the answer lies in the first two points discussed earlier – goals and risk appetite.
If the market is falling and your goals are long term in nature, you can hold onto your investments as the market would correct itself, no matter its bearish run. In fact, the Sensex has emerged stronger after every crash. Have a look –
If you are on the initial curve of the fall, you can also book your profits and switch to debt mutual funds to protect against the volatility.
If you have a low-risk appetite, then also you should book your returns and switch to debt to prevent losing money.
5) Invest When the Market is Down
When the market is in a bear run and falling, it is a good time to invest as the stocks would be undervalued. Thereafter, when the market would rise, your investments would give you attractive returns.
So, a falling market is not necessarily a sign of losses. If you look on the brighter side, you can actually make profits by investing in undervalued stocks at that time.
That being said, try and buy good companies at a cheaper value and not bad stocks. Good companies would give good returns but bad ones would never do, even when the market is bullish.
So, try and choose the best-rated stocks with a high Price/Earnings (P/E) ratio as these companies would deliver good profits.
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6) Create a Diversified Financial Portfolio
Which is your favourite investment avenue? If only one or two names spring to your mind, it is a cause of concern. Can you live on one food for your entire life? Variety is the needed spice, isn’t it, both from the taste and nutrition point of view?
So why play favourites with investments?
Your portfolio should be a mix of different investment avenues with different asset classes.
You need a mix of –
– Equity and debt investments
– Long term and short term products
– Fixed and liquid avenues
So while mutual funds are good, a little bit of fixed deposit should also be a part of your portfolio. Similarly, if gold is your preferred avenue, invest in equity too for liquidity and better returns.
Here’s a complete guide on how to invest in Gold
A skewed portfolio, with a majority of one or two investment avenues, is a recipe for disaster. If any one of the avenues does not perform well, your entire investments would be in jeopardy.
For example, if you have a heavy proportion of real estate investments, where would you get money for emergency needs?
Too much exposure to equity is fatal in a market crash and too much investment in fixed income avenues is suicidal from an inflation point of view.
What you need is a balance of flavours, a balance of nutrition and a balance of investment avenues. Create a balanced and diversified portfolio and losing money on investments would be a thing of the past.
7) Factor in Inflation
Remember that inflation always eats into the purchasing power of money. Moreover, inflation is a reality and if the economy is growing, there would always be inflation.
So, when you invest, factor in this inflation. Invest in avenues that give you inflation-adjusted returns, i.e. returns that have a positive value even after factoring in inflation.
If you invest in avenues where the returns are not inflation adjusted, you would ultimately lose money even though the avenues give returns because such returns would have a low real worth. For example, say a fixed deposit scheme gives you a return of 6% per annum.
If the inflation in the country is 6.5% per annum, the return that you get from your fixed deposits is actually negative.
Let’s see it in monetary perspective.
Rs.100 would fetch you a return of Rs.6 in a fixed deposit scheme. You plan on buying an item costing Rs.6 with the return that you get. Now, after a year, inflation has driven the cost of the item to Rs.7 but you get a return of Rs.6 from the deposit scheme. Is the return worth it especially since you can no longer afford to buy the article that you wanted?
Inflation, therefore, puts a leak into your returns, a leak that can be plugged by choosing inflation-adjusted investment avenues.
8) Review Your Financial Portfolio, Regularly
Another mistake that most investors make is that they invest and forget. This is another reason why they end up losing money on their returns. How many times do you opt for rollover of your fixed deposits on maturity?
Your financial needs keep changing with changing lifestyle. Your financial portfolio, therefore, needs to change to keep pace with your changing needs.
Change is the only constant and if your portfolio is stagnant you would lose out on the opportunities of maximizing your returns. So, make it a point to review your portfolio periodically, at least once every 6 months or a year.
This reviewing helps you make the necessary changes to your investments. You can redeem your investments if the time is right, you can make additional investments into a fund that is performing exceptionally well, or, you can switch around your portfolio to change the investment combinations.
Review and shuffle your portfolio to reflect whatever you think is the need of the hour to keep your investments relevant and to maximize returns.
Take this financial resolution to have a financial healthy year
9) Learn, Learn, Learn
Do you know why investors lose money even when they try and pick the best investment avenues? Lack of financial knowledge, that’s why and in India, financial literacy is depressingly low.
As per a Standard & Poor survey conducted in the year 2014, more than 76% of Indian adults did not understand the basics of financial planning. Have a look at the numbers of the survey –
Lack of financial awareness is the reason why investors cannot plan their financial right. They have limited knowledge of risk diversification, inflation, interest-earning, etc.
As such, they fail to choose the right avenues that would help them get the best returns on their money. The result – they lose out on returns. Financial literacy is, therefore, the foundation for building an effective financial portfolio. It is the bedrock of your finances and if you get the knowledge part right, you can avoid losing money on investments.
Here are few courses on Koppr Academy that will help you to get the right knowledge in Finance
If financial literacy is not your strong suit, you can take the help of online courses designed to impart the necessary wisdom. We have curated some of the most comprehensive financial courses on different financial instruments and financial planning as a whole. You can take the help of our courses and learn the ABC of finance.
Acknowledging is winning half the battle in investing right. Armed with sufficient financial knowledge, if you avoid the earlier discussed pitfalls, you can create a leak-proof financial portfolio which prevents loss of money either because of losses, tax cuts or improper financial planning.
So, start your financial journey on a strong footing. Learn the basics first – our courses are there to help you. Then start your investment journey. Plan your goals, understand your risk appetite, plan your taxes, invest right, redeem right, have a diversified portfolio and do a periodic review.
Plug your portfolio leaks and avoid making losses by investing right.