The dilemmas of first-time investors

Most of us have understood the importance of investing our hard-earned money, rather than just saving it and keeping it in banks. The financial world takes lots of initiatives to improve financial literacy among the general public. There are many good and bad advice circulating in media, newspapers. Don’t let common misconceptions distract you from your financial goal.

Let’s look at some dilemmas first-time investor goes through and the explanations that can help them to fix the dilemmas and avoid doing common investment mistakes.

1.No right time to enter the market

No one can give a guarantee that the market will perform well. You can make predictions based on your experience or analysis of the market but even the most seasoned market experts will not be able to tell you the right time to enter/exit the market. The time you stay invested in the market is more important than timing the market. When you invest, the ideal approach should be to start investing early and for the long-term to ensure capital appreciation and wealth creation. The compounding will play its role automatically as you stay longer in the stock market. SIPs can help generate extraordinary returns.

2.Balancing between diversification and over-diversification

Meaningful Portfolio diversification is important since putting all your eggs into one basket is a risk. You cannot have a portfolio with a particular category of asset class or investment instrument. The objective of diversification is to mitigate or manage the risk of loss by ensuring exposure across multiple asset classes. Over-diversification may lead to a reduction in returns rather than a reduction in risks. 

3.Value over anything else

Investing in companies that promise value and growth in the long-term is the ideal approach. Investing in securities that appreciate exponentially in a short time frame without any actual growth in the company may turn out to be one of the riskiest things. Value investing aims to identify opportunities in profitable and cash-generating businesses. 

4.Calculated Risk is good

We need to understand that risk and returns go hand in hand. Investors think that taking a high risk will give them high returns, but that’s not always true. No investment comes with ‘no risk’. 

5.Asset allocation is important

Today, investors have many options. To ensure maximum probability of meeting financial goals, focus on ‘asset allocation’.  You need to decide the ratio of your exposure to equity, debt, hybrid, and physical assets depending on your risk profile, financial goals, corpus, age, etc. It will surely help investors increase returns & also minimize the risk since different asset classes react differently across market cycles.

6.Stocks or Mutual funds

If you do not have the time and expertise to study and monitor a portfolio of stocks, then it is better that you invest in mutual funds. If your corpus is small, then equity mutual funds are more meaningful since they give you the benefit of diversification and professional fund management at a low cost. Equities & Mutual funds, both can beat inflation and create wealth over the long term.

7.Long term versus short term investing

The short-term financial goals can be fulfilled with fixed income instruments or balanced mutual funds while long-term financial goals can be fulfilled with diversified direct stocks or equity mutual fund investments. 

8.DIY or consult a financial advisor

New investors should start an overall financial plan with a professional planner. DIY investing is not advisable unless you have gained the knowledge in financial planning & investment field. Investment and financial planning are complex and solutions can be different for every individual on a case-by-case basis.

A financial advisor will help set financial goals and plan investments according to the investor's risk profile. The fees or commission the investor pays to Advisor or Distributor will be worth considering potential mistakes made in absence of proper advice.