Often in their enthusiasm, clients make some financial mistakes that impact their investments. It is important for advisors to save clients from making such mistakes.
Taking a cue from the CFA Institute report titled, ‘Tips for Avoiding the Top 20 Common Investment Mistakes’, we have shortlisted the top five common mistakes that Indian investors make.
- Expecting too much or using someone else’s expectations
Investing for the long term involves creating a well-diversified portfolio designed to provide you with the appropriate levels of risk and return under a variety of market scenarios. But even after designing the right portfolio, no one can predict or control what returns the market will actually provide.
Advisors have to constantly remind their clients that it is important not to expect too much and to be careful when figuring out what to expect. You can tell them that nobody can tell you what a reasonable rate of return is without understanding you, your goals and your current asset allocation.
- Focusing too much on taxes
Very often, investors focus more on the tax-saving part rather than the inherent risk and returns of the investment product.
Clearly, investors should be smart about taxes since tax benefits can improve their returns significantly. But it is important that the call to buy or sell a security is driven by its fundamentals, not its tax consequences.
- Reacting to the media
Advisors often complain that the market events and news influence their client’s investment decisions.
At such times, IFAs should help clients strike an emotional balance. You do not want them to overreact to bad news or opportunities instead you want them to recognize when portfolios need to change.
- Chasing returns
Investors often select investment products based on past performance. However, past performance does not necessarily mean that the fund will maintain its performance.
At such times, advisors should ensure that their clients stick to their investment plan and rebalance the portfolio if required.
- Forgetting about inflation
Most investors focus on nominal returns instead of real returns. It is important to remember that what your clients can buy with the assets they have is in many ways more important than their value in rupee terms.