Indian Finance: Mistakes commonly made by equity investors

Everybody makes mistakes in the equity market, so one cannot blame retail investors for making many mistakes. Even acclaimed mutual fund and hedge fund investors have made mistakes over the years, but that does not excuse the retail investors from trying to learn about the mistakes that they keep on making so that they reduce the number of mistakes they make in the future. At the minimum, investors should learn about these mistakes so that they can try and learn from these mistakes. Some of these mistakes are:
1. Investors typically join the herd. So, when the stock market crashes, people run to liquidate their holdings, even at a loss. For example, when the market was really down in October, companies that were fundamentally sound were picked up by people who believed in the long term.
2. People look at tips, and even do investment based on tips even if they know nothing about the company or stock.
3. People do not read about the fundamentals of the companies that they are investing in. Typically, company valuations follow the projections of the sectors that these companies belong to, and after that, the company performance also plays a role. However, people do not bother finding out these facts.
4. People invest and forget. There are a number of people who invest in companies or mutual funds and do not re-evaluate the nature of their investments and the performance over a regular period, say every 6 months or every year
5. Diversify your portfolio: Do not invest everything you have in the stock market. Invest in mutual funds, some in debt funds, some in PPF, some in realty, and so on. Make sure that you are properly diversifying your investments, at the same time, make sure that you invest only where are you comfortable in your level of knowledge. Even consider things such as investments in gold and art.
6. Don't get caught up in greed. When people lost out in January 2008 after markets had climbed to record highs, people were not willing to consider that the market could go down. People were not willing to take some of their investments out of the market, and lock that money in safer investments.
7. Invest for the long term. Don't get scared by short term movements. Even while tracking them, make sure that if you have invested based on fundamentals, and for the long term, you don't lose patience.
8. Don't get tricked by other people. You will always hear people say that they made incredible amounts of money in investing in the stock market, and there is a feeling of being left behind. Remember, you only hear the stories that are positive, and you should never let such stories guide your actions.

Indian finance: Safety vs. risk in terms of investments

One typically hears of cases where people have invested money in dubious investment schemes run by scheming and smooth investment gurus who actually end up duping people of their hard-earned money. These smooth operators typically get caught, but this is no consolation for those people who lose their money in these schemes. Similarly, people end up losing their money when they invest in stocks and mutual funds, either if the entire market collapses or if they invest in very risky stocks. So does this mean that people should invest in risk free investments ? No, because there is a ratio between risk and return. It is for every individual to decide their risk - return paradigm based on their comfort levels, and their ability to take risks. Read this article to learn more:

The rating scale starts with AAA (lowest credit risk) and ends at D (default grade, highest credit risk). Going by the normal yardstick, one should always go for the best. So, should all the investors invest only in AAA rated issues? To fathom this paradigm, we have to understand the riskreturn relationship. Risk-return & risk aversion. It is because of the relationship between risk and return — higher the risk, greater has to be the expected return on that investment and vice versa. An investor hoping for higher returns has to embrace the risks that are attached to it.
But how does an investor decide how much risk to be taken? In reality, there is nothing like optimal risk-return trade off. It is often a derivative of various factors like time horizon, liquidity, and some investor specific circumstances. The risk-return trade off is extendable to equities as an asset class also. The relative safety of investing in blue chips may not result in highest returns. In case of IPOs also, the IPO grading is an opinion on the relative fundamentals of the company. The investor decision is guided to a large extent by the valuation and risk tolerance.

So, as they say, the ability of a person to take some risk in their investment is guided by multiple factors. The only thing one should do is to ensure that one has thought through the investment carefully.