Learning how to invest? Make sure to avoid these 5 mistakes

Want to start your investment journey but confused about where to begin? You are not alone.

While strategic investment is the key to financial security, learning how to invest effectively can be overwhelming for beginners. With so many complex terms, endless options, and potential risks, it’s easy to feel anxious about making a mistake – after all, no one wants to see their hard-earned money disappear because of one wrong move.

Lucky for you, you can learn how to make a goal-oriented investment strategy by understanding and avoiding these five common mistakes new investors make. Find out common pitfalls that stump beginners and learn how to invest better with this guide.

Common investment mistakes to avoid
 

Given below are the five biggest investing mistakes that can cause your investment strategy to backfire when you begin your journey of learning how to invest –

1. Lack of research or understanding

Multiple investment options are available in the market, each with specific features and benefits. With so many options available, choosing something that does not align with your financial goals or risk appetite is very easy. A common mistake made by beginners learning how to invest is going for an investment avenue without proper research.

The right way

Warren Buffet has said, “Never invest in a business you cannot understand”. He emphasises the importance of research and knowledge before making investment decisions. After all, it is your hard-earned money!

As you learn how to invest, research the product before investing money in it. Here are some things to find out before you invest –

1. Features and benefits of the investment avenue, including how the investment works
2. Minimum and maximum investment tenure
3. Risks involved, i.e., how risky the investment is
4. Expected returns, i.e., whether you get assured returns or whether the returns are dependent on market movement
5. Liquidity, i.e., how easily can you convert the investment into cash when needed
6. Tax benefit on the investment made and the returns earned, i.e., whether you are eligible for any tax deductions

For instance, if you want to invest in fixed deposits (FDs), understanding the tenure available and the liquidity of the deposit is very important. You should also be aware of the expected returns, minimal risk of volatility, and tax benefits.

For instance, if you choose 5-year FDs offered by banks and post offices, you can save tax under Section 80C on the invested amount. However, the return potential of FDs is limited. Even if the equity market is performing well, you will only get a fixed return from your FD.

Similarly, it is important to understand the ins and outs of different investment avenues and choose assets that align with your investment strategy.

2. Myopic investing horizon

Having a myopic investing horizon is another common mistake made by beginners learning how to invest. When it comes to investing, the longer your investment horizon, the better. Short-term investing or focusing on short-term returns is a mistake. Unless you have to save for short-term goals, do not look for returns or redemptions within a short period of time, especially when you invest in market-linked instruments which are volatile.

The right way

Warren Buffet has said, “No matter how great the talent or efforts, some things just take time.” The same holds true when you’re learning how to invest. While making diverse strategic investments is important, so is allowing them the time needed to reap returns.

Give your savings time to grow. With compounding of returns, your savings can multiply over time. In fact, the longer you stay invested, the better the returns you can earn.

Here’s a quick example of how a difference of five years can affect your investment corpus –

3. Playing favourites with investment avenues

You might have a favourite colour, choice of food, holiday destination, or even a friend. But when you’re figuring out how to invest your money wisely, playing favourites is counterproductive. Investing in one or two asset classes can be detrimental to your returns.

For instance, if you invest only in FDs, you might be losing out on the return potential of the equity market. On the other hand, if you only prefer equity, short-term volatility might wipe out your savings.

The right way

Ever heard the saying – don’t put all your eggs in one basket? The same rule applies to investing.

Diversification is the name of the game. It means putting your savings in different types of investment avenues to minimise risks while maximising the return potential. For instance, if you invest in FDs, equity, and gold, you can enjoy the stability of FDs, the return potential of equity and the capital growth of gold.

Just like a balanced meal contains different portions of nutrients, a balanced portfolio should contain different types of investments. Choose investments across different asset classes, including equity, debt, gold, etc.

Here are some options to consider with their pros and cons –

4. Not understanding your risk appetite

Different investment options have different types of risk profiles. For instance, equity investments are usually considered risky, while debt instruments have low risks. Your risk appetite defines your tolerance for weathering financial ups and downs and handling investment losses.

Generally, younger individuals learning how to invest for the long term prefer high-risk options that yield higher returns. On the other hand, low risks equal low but stable returns and are more suited for older investors who aim to protect their capital.

Not understanding your risk appetite when investing can lead you to make wrong choices. Depending on your financial goals, timeline, and comfort with market fluctuations, your risk appetite can vary greatly. Thoroughly research any investment avenue and check if it aligns with your risk appetite before investing money.

The right way

Always analyse your risk appetite and then choose investment avenues that align with it. For instance, if you can afford to take risks, try investing a major proportion of your portfolio in equity. On the other hand, if you want to avoid risks, debt instruments would be a better choice.

5. Ignoring financial literacy

The investment world can be confusing with multiple choices and the technicalities associated with each. Without financial literacy, you might make wrong moves in your journey of learning how to invest, which can prove costly.

The right way

As you learn how to invest, seek professional guidance or help from experts. You can also enrol in self-learning financial courses, like those offered by IDFC FIRST Academy, to build your financial knowledge.

Financial literacy will help you understand how to make an investment strategy. It will also help you avoid some of the biggest investing mistakes beginners make. If you seek help from expert financial advisors, they can help you research an avenue before investing so that you know where you are putting your money.

IDFC FIRST Academy: Your platform for financial literacy
 

IDFC FIRST Academy is an educational platform to help new investors learn the ropes of how to invest wisely. The various resources that the Academy offers can guide you through the complexities of investing so that you can make the right decisions.

Here’s what you get –

1. Easy learning modules to learn the basics of finance
2. Flexible courses designed for you and your family
3. Wide range of subjects - money, investing, budgeting, taxation, banking, etc.
4. Earn certificates on each level of progress

Find the right answers for everything related to finance and learn the basics of investing one lesson at a time!

Invest wise, invest right!
 

Start your investment journey on a positive note with IDFC FIRST Academy. Learn the basics of finance and investments and know how to invest wisely. Know what an investment strategy is and create one that matches your financial needs.

Equip yourself with the right knowledge to make the right strategic investment decisions. Just like you work hard to earn money, let your money work hard and reap returns to meet your financial goals easily.