5 major mistakes investors make

Investor mistakes are just too many and to me everything looks major. P V Subramanyam tells a few that bother and bug him as an investment advisor.

Not because it hurts my portfolio, but I am at the receiving end if the person is known to me :-)

1. Going for a walk with the wrong person

People start a small SIP and they go for a walk with the wrong person! This person tells them how they can 'create' a HUF, how they can invest in their father-in-laws name, their children's names, and how the whole amount will be tax free. God, why do they have my phone number? And why do they consider it IMMORAL to invest in equities and let me know about it? Do what you want, you do not owe me an explanation for investing or not investing in an equity fund. Please choose your poison.

2. Focussing on immediate past results

Almost everybody is convinced that liquid funds will give about 8 per cent return and if a liquid fund gives lesser returns than that, it is a bad fund. Well, well. You can only tell people that the past performance is not a good indicator of what to expect in the next few months or quarters. You look at history only to see the style -- like why a Yuvraj is a better batsman than Rahul Dravid in a T20 scenario. On that day how much he will score is just not known.

Concentrating on the immediate past results also has another problem. In a match where say Virat Kohli scores a zero and Ashwin scores 30, you might conclude that Ashwin is a better batsman. This is obviously dangerous.

3. Asking too many WRONG questions

'If instead of investing in Wipro, if I had invested in Silverline I would have lost money, no?'. Sure you would have lost money. Why do you not invest in a mutual fund? 'But Subra I did invest in ILFS E-commerce fund and lost Rs 5000. From then on I have stuck to bank fixed deposits. Now tell me, can I lose money in a bank fixed deposit?' Honestly I have no clue how to handle this question, at least for free.

If he were attending a paid lecture I could take some trouble -- for a free guy the answer has to be 'yes sir, you SHOULD keep all your money in a bank fixed deposit'.

4. Not knowing the difference between real returns, and absolute returns

Most of them do not comprehend the 80 per cent return that equities give once in 5 years and then the negative returns for say 5 years. This is so difficult for them to comprehend that they keep saying 'this will not happen again'. This could be innumeracy, but then not understanding 'Real returns' and goal-oriented investing is pretty stunning.

'Goal-based investing' has to be the one and only focus of a retail investor. For this s/he has to write down her/his goals and make sure that all the investments are headed in the right direction.

There can be no investing if the investing is not GOAL BASED.

5. Loving simple instruments out of sheer laziness

They love fixed income products. It goes up EVERY DAY. Keep a fixed deposit with a bank with daily accrual. You get an awesome feeling that your net worth is going up EVERY DAY. Imagine if your annual income from interest is Rs 36,50,000, it means your income is Rs 10,000 every day!! This is so impressive. Everyday your income is going up and you can feel great. This can be encashed, it can be spent and it will ALWAYS be there for you.

It is easy to fall in love with such nonsense especially if you do not understand that after 20 years too it will remain the same. Such people are fixated not only about debt instruments but also the fact that it has to be in a bank. For these people even a mutual fund debt scheme looks risky (sir Investments are subject to market risk no sir, why should I invest in mutual funds). I love them. They help Jaitely to reduce the deficit.

Illustration: Uttam Ghosh/Rediff.com