Some people invest for growth (to build up their wealth) and some people invest for a regular income. When investing for growth, it is far more common to do the wrong things than to not do the right things.
Here we tell you what not to do.
1. Don't buy on tips
The market is full of 'investors' who appear to think that the sole way of making money is through tips.
But tips are not solid investments. They are not based on research. Such stocks are more likely to fall faster and harder when the market turns.
Do your homework. If you are not capable of doing so, then invest in equity mutual funds where the fund manager does his stock picking for you. Here too, go by the fund's performance, not just another tip.
2. Don't chase the latest performance
Far too many investors end up making investments based on immediate past performance. In a bull market, there are plenty of stocks and funds that look just great and have been rising fast.
But the real test lies in how much this stock or fund falls when the market turns bearish.
Small cap and mid cap stocks get hard hit in such markets. Even where funds are concerned, look for those that have survived bear markets.
3. Don't buy anything you cannot understand
Before you buy an investment, understand how it works and why you are buying it. If you are buying a stock, you must understand why you think it will rise. You must have an idea of what the company does, how much it will make, what a good price for it is and whether it is underpriced.
If you do not have the time and skills to analyse all this, then invest in a mutual fund.
4. Don't buy without a strategy
The first step is to have a strategy. You must be clear on how much you plan to invest in stocks or funds or other investments. Once you decide on that, then start looking for good picks within that investment. Don't start with the question: "Is there a good fund or stock to buy?"
Instead start with: "How much can I afford to invest in stocks and mutual funds?"
There are always good funds to buy. But that is not a good enough reason to buy one.
5. Don't ignore risk
If you do not want to incur any risk, then try the Public Provident Fund and post office schemes. But once you decide to invest in shares and equity mutual funds, you will be incurring risk.
In some cases, you may not even get a return. In fact, you may even lose your principal (the amount you invested).
Another way to see it is deciding when you should invest. In a bull market, when you buy a stock that has already risen substantially over the past few months, you are taking a higher risk than someone who bought it six months ago.
6. Don't ever time the market
Timing the market rarely works. No one can say for a fact in which direction it is going to move in.
The key is to invest regularly irrespective of the state of the market.
7. Don't hold on to losers
We all end up investing in duds, whether stocks or funds. Once you realise that an investment is bad, there is no point in holding on to it. You will be much better off taking out the money and making a better investment.
8. Don't ignore expenses
Don't just jump in and out of stocks and funds.
Buying or selling a stock? You will have to pay brokerage (fee you pay to your broker for buying and selling shares) and Securities Transaction Tax (fee you pay to the government when you buy and sell stocks).
Mutual funds too have loads and other expenses.
And of course, there is capital gains tax if you sell within a year. Read All you wanted to know about capital gains.
So don't simply hop in and out of shares and funds. Take a look at these other issues too.
