This small mistake can ruin your investments completely

Do you remember what was your action plan before buying your first bike? Did you not conduct a research on various brands, looked at the trend of each brand and how they worked and chose the best one you liked? Even though, your bike helps you to travel places, no matter what, the resale value will be lesser than the buying price. Isn’t it?

You are investing your time and energy in an object which will not get you any money in return few years down the lane. Think about the amount of time and effort you need to spend on something which is going to bring in more returns. Enough knowledge and informed decision making will help you to become a great investor. Go ahead and read to know how you can become an expert in stock market investing.

Look before you leap
Foremost among all, have a goal set in. For example, ‘I am 25 now and want to earn ‘X’ amount when I am 45, it is going to be ‘Y’ amount when I am 58 or 60 while retiring’. Focus on choosing the fundamental investment models which can bring in returns as you have planned. Understand the business, company, market fluctuations before stepping into the market.

The ugly truth about investing with ‘gut feeling’
Investing on stocks with a gut feeling may be successful at times, but it is not a right strategy in the long run. All that glitters is not gold. Remember the retirees, middle class and lower middle class workers coming to road crying for their money back when finance companies offered fixed deposits with 18 per cent interest rates but defaulted. Most of them did not know the intricacies of how these finance companies were running and where exactly they invested the money received from the public. Similar thing happened to the investors in Emu farming business.

Insurance agents, mutual fund brokers, and stock brokers have got a bundle of schemes to sell you. They have got their monthly business targets to meet. Listen to them and learn about various options available to invest on stock market. Do your homework well before getting in. Investing without any knowledge about how investment model works will be very risky. Investing on stock market without enough knowledge is like giving a knife to a 2 year old as he can seriously hurt himself or the others.

Why you will never be a successful investor so long as you invest without understanding the product?
It is true that investing on stocks is risky as in running any business. One needs to take a calculated risk. The blindly taken risk and uninformed decision making will lead your investment to go into pieces.

Mutual fund NFOs that joined the IPO club in 2008 will be the best example here. The pure equity NFOs from the mutual fund companies raised Rs. 32,309 crores in 2006 and this NFO collection went up to Rs. 55,000 crores in 2007. About 71 per cent of these schemes were trying to cope up with less than Rs. 10 per unit in 2008.

An analysis done by ETIG brought out the truth about these equity NFOs. Without realising that the mutual fund is different from the stock market IPOs, there were huge losses reported from the investors. Those who learnt well and understood the wrong projection of mutual fund as IPO escaped from a huge loss. This had even led to banning the word ‘IPO’ when new offers were made on mutual funds.

A deep danger to your investments and how to avoid it
Be careful about the structured investment products that come under many names like capital protection schemes, Highest NAV guaranteed Schemes, Nifty linked structured products and more.

Most of the times, the banks, mutual funds or Insurance companies offer such products. They commonly offer these products with the ‘unwritten’ guarantee to secure your capital investment. These products are not easy to understand and they invest in shares, derivatives and debt instruments. They will use risky asset class, but will claim they have combined different asset classes in a way the risk is nullified.

Few simple questions that could make you a successful investor
Do not invest in anything which you are not able to understand. One of the main reasons why investors lose money in the stock market is they do not understand completely the product in which they are investing and they don’t know what is the level of risk they take with those investments.

If you are on the verge of investing in mutual fund or other stock market, based investment options, ask yourself the below questions before leaping into the market.

  • Is this investment scheme registered with SEBI or other regulating authorities?
  • Is this investment suitable to me? Is this matching with my financial goals?
  • What is the risk involved and am I comfortable taking that risk?
  • How is this investment going to make money? (By way of dividend, interest, capital appreciation)
  • What must happen for this investment to appreciate in value? (Stock market should go up, interest rate should come down, and midcap should do well…)
  • What are all the charges in the scheme?
  • How liquid the scheme or investment is?

Most importantly, learn through the history to know how the market fluctuations have impacted any particular stock or a mutual fund. You can help yourself by remembering a quote of Warren Buffet, “The markets like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.” Swimming in the ocean is not the same as you swim in your own pool. You need to check on the wind, waves, and the pattern of the tide before getting into the water. A slight mistake here will drown the person.

Committing mistakes and then blaming the market will not help to save even a penny. Estimate the risks involved in each model and the ways to save your money in such scenarios. Do your homework and understand before investing. An ounce of prevention is worth a pound of cure. By failing to prepare, you are preparing to fail.

K. Ramalingam is the chief financial planner at Holistic Investment Planners, a leading financial planning and wealth management company. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.