3 Step Guide for a Safer Investment

By BankBazaar | May 4, 2012

The whole idea of investments and savings is pursued in order to secure one’s financial future. Adopting this pursuit enables one to not depend on any debt like a personal loan or a home loan or any other forms of debt to fulfill one’s financial goals and dreams by strengthening their overall capital. But any act of imprudence can erode your finances away leaving you to wander about in the avenues of credit thereby disrupting your financial strength. It is not always that investors lose due to bad investment decisions; there are certain other factors that come into the picture when we speak about bad financial investment days. While investors have been facing the brunt of bad market conditions, it is time they safeguard themselves against bad investment practices. Keeping the inconsistent performance of the market in mind, investors need to be cautious and aware, being abreast of the market scenario at all times. Here is a 3-step guide to avoid the major investment mistakes to protect their interests and make informed market decisions.

a) Making investments based on performances over a short-period of time– This is the most common mistake an investor can make in today’s transcending market scenario. Never make investments in a fund based on its short-term performance. It is critical that you thoroughly conduct research in the initial stages, prior to making an investment, as this would form the groundwork or foundation of your investment portfolio. Analyze the performance of the investment over different time frames; over 3-year or 5-year time frame; as a review of the historical performance of a fund since it is the best indicator of its financial health. Also, look at several other factors like quality of the entire investment process, the credentials of the fund manager, the rating or pedigree of the asset management company, and several other factors before making your foray in an investment.

b) Never be influenced by the inflows and outflows of assets

With news on the inflows and outflows of assets receiving a lot of coverage and hype, it is mandatory for an investor to not base any of his decisions on this information. Hot discussions on which category of mutual funds received the most inflows and which had a lot of outflows misguides the investor, offering him a wrong view or perception on the performance of a fund. This is because those investments with the most inflows are believed to be the most profitable performers and funds with the most outflows are believed to be the least profitable. This does not hold true as inflows and outflows of an asset may be a valid indicator of the investor sentiment in it, but not its growth or profitability prospects.

c) Replicating the portfolio of a fund manager – Often, investors make the common folly of attempting to duplicate the investment pattern of a successful fund manager by trying to invest in the same stocks. This is not a very reliable or advisable method as the investor will never be able to understand the reason behind why the fund manager decided to purchase certain stocks and other such information. If you are impressed with a fund manager’s style of investment, then spare any form of trouble by investing in the fund all by yourself, to stay safe and secure.

Apart from this, revaluing and reassessing your portfolio is also needed as it can speak in itself volumes as to how strong or vulnerable your portfolio is. Any major deviation from the benchmarks should alert you to get in touch with your financial advisor in order to take the necessary steps so as to avert any major financial downfall.

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