FOR EXISTING POLICY
FOR NEW POLICY
5 Investment Mistakes to Avoid in 2021
24-June-2021 |
Uncertainty is all around us, more so than ever today. With the ongoing COVID-19 pandemic, worrying about your job and finances is quite normal and natural. While having a job that is paying you a regular salary in these difficult times is no less than a blessing, thinking about alternative, passive streams of income can help you further.
A passive income stream (regular earnings from a source other than an employer or contractor) will help you create financial stability and freedom in your financial life. Since passive income streams aren't limited by effort and time, they can help you build your wealth efficiently.
One of the most sought-after passive income streams of today’s times is stock market investments, an excellent vehicle to help you achieve your long-term financial goals. The investment market in India has a lot to offer, from safe and low-risk stocks to handsomely-rewarding, yet high-risk investment options.
While your reasons for investing in the stock market could be varied - from paying for your higher education or saving for a dream vacation, we must remember that one can potentially get carried away when it comes to investing, especially while dabbling in the stock market.
Here are 5 common investing mistakes you should be wary of and avoid while investing in 2021.
Investment Mistakes You Must Avoid in 2021
1. Not having a clear investment goal and plan
Before you start investing, make sure to define your short, mid-term, and long-term goals. Having clear financial goals will help you understand what steps you must take to achieve them.
Just like you did with your goals, it is imperative to divide your investment plan into three sections too: short, mid, and long-term goals. For instance, buying a new vehicle can be a mid-term goal, and planning for your retirement can be your long-term goal. Hence, based on your goals and their financial requisites, you can look for the right financial instruments to help you achieve them.
It is this simple, plan your financial goals that can help you make better investment decisions. Along with this, educating yourself about the various financial instruments and understanding which options are the most suitable for you can further drive your investments in the right direction.
2. Making impatient decisions
One of the most common attributes some investors possess is impatience. One of the biggest investment mistakes one can make is to sell the stock as soon as it touches a small high. While it may be beneficial for intraday orders (buying and selling stocks within the same trading day), if you have chosen a valuable stock with the potential to rise, selling the stock in haste can lead to long term losses.
Impatient investors generally live in a constant state of panic which may sometimes result in financial losses. It is of utmost importance to learn and imbibe the art of patience in the while managing your investments.
Many volatile investors compare their losses with other's gains and make irrational decisions. Making such decisions can lead to incurring heavy losses. One of the easiest ways to benefit from investments is to hold valuable instruments that are fundamentally strong. When you hold a sound investment solution in your portfolio, your portfolio's value rises with the investment’s performance. To benefit from an investment, especially market-linked investment avenues, you must practice holding the investment for the long-term and being patient with it.
3. Expecting high returns
Many novice investors start investing with the mindset that it will offer them extremely high returns, in a short span of time. While it could have been true for some experienced investors, it could be potentially one of the biggest investment mistakes.
Your main motive to invest must not be based on greed to earn high returns. Sometimes your investments may provide you with high returns, while sometimes, they may break even. It will be best to accept risk profiling that higher the risk, higher the return but in cases higher (potential) losses too.
Along with this, market-linked investments are volatile, and it is difficult to predict how they will perform. Hence, to make profitable decisions, you must learn about the fundamentals of the instrument that you are investing with, to analyze whether it is a good selection or not.
Further, it is also advisable to analyze your own risk appetite to get an insight into whether you have the high-risk taking capabilities or not.
4. Avoiding diversification
Diversification involves investing in different asset classes. For instance, if you only choose a single asset class for your investment portfolio, you are risking everything on that single investment. If the investment faces certain heavy losses, your entire portfolio may be jeopardized. However, when you have included different investment instruments in the portfolio of different asset classes, you are spreading the risk. It is an excellent way to minimize the risk you include in your portfolio.
For instance, if one of your investments hasn't performed well while some other investment has performed decently. This way, your portfolio will be balanced, and the losses are mitigated.
Diversification can also reduce the volatility in your portfolio. With diversification you are making sure you do not put all of your eggs in a single basket. While this practice does not promise you a guaranteed1 profit, it will help protect your invested corpus from harmful factors.
5. Making emotionally driven decisions
Investing profitably requires high-level skills and not making decisions driven by emotions. When investors make decisions, they use different emotional filters to analyze the situation and predict the outcome. However, making investment decisions driven by your emotions can lead to heavy losses.
For instance, you may reach your target with a market-linked investment, but out of greed, you probably hold it for a longer time to benefit from its profit. However, the investment may experience some downfall, and you may lose all of your gains. Sometimes, you may also choose an investment simply because a relative or peer has suggested it. Choosing your investments based only on other’s experiences can be harmful in the long run. Hence, it is important to not let your emotions take over your rational thinking. Taking rational, realistic and logical decisions to invest will help you profit better from the market.
Along with stock market investments, buying a suitable life insurance plan can also prove to be a smart move. As mentioned before, it is crucial to diversify your investment portfolio while also putting your eggs into varying risk baskets. Stock markets are conventionally high-risk avenues. You can balance the risk by investing in life insurance plans.
Pure protection plans provide only life cover which can hedge the risks of a stock market investment and help your family pay off any debts or financial liabilities in your absence.
If you wish to earn assured, no-risk returns on investments, along with life cover, you can choose life insurance guaranteed1 savings plans. These plans are great for long-term savings and have non-market-linked returns, thereby assuring a lump sum payout guarantee1.
Finally, if you wish to combine market-linked investments with life cover, you can opt for ULIPs. Unit Linked Insurance Plans are perfect avenues for market-linked wealth generation, while assuring protection to your family’s finances. You have the option of choosing the funds – equity, debt or balanced, based on your specific risk profile.
Thus, with life insurance plans, you can supplement the high-risk stock market investments with protection and life cover.
Life Insurance Investments in a Post-Pandemic World
The beginning of the COVID-19 pandemic put a lot of pressure on businesses, including the insurance sector. However, with people realizing the importance of life insurance in a post-pandemic world, the insurance industry saw a YoY (year-on-year) increase of 16% in the business premiums paid in the second quarter of 2020-21. This increase was mainly because of people’s changing perceptions towards life insurance plans as more of risk cover than simply an investment or tax*-saving avenue.
In the post-pandemic world, life insurance is being considered as a necessity. However, life insurance can also be an excellent investment avenue, especially if you have a low-risk appetite. It is also a great option if you are looking for a single instrument for both insurance and investment.
Term insurance are pure protection plans that offer extensive life cover. However, if you need guaranteed1 returns on maturity, then you can opt for life insurance savings solutions. These plans are great investment avenues for low to mid-risk investors who need guaranteed1 returns on their investments, along with an assured life cover.
Investors with slightly higher risk appetites can go for Unit Linked Insurance Plans (ULIPs), wherein the premiums are invested in market-linked instruments. Just like savings plans, here too, you get a life cover, but the returns are not assured. The maturity payout will be dependent on market returns. You can choose between equity, debt or hybrid funds for your ULIP investments based on your risk profile.
Tata AIA Life Insurance offers a range of life insurance products to provide for all kinds of insurance seekers:
Term Insurance plans for pure protection and affordable life cover.
Savings solutions for the dual benefit of life cover and guaranteed1 returns on investments.
Wealth solutions for life cover, along with market-linked investment returns.
Retirement solutions to make the later innings of your life financially secured.
Summing Up
Financial investments can be quite optimal for creating a new source of income. However, it can also lead to heavy losses if done recklessly. If you've decided to begin investing, then knowing about the common investment mistakes to avoid and following the tips mentioned above will be helpful to build a secured and stable investment portfolio.
Happy investing!
L&C/Advt/2021/Jun/0868
