Watch out for these fundamental flaws

One step forward, two steps back sums up the investment strategy evaluation where a lot of people are concerned. The obsession with taking one large step forward makes them overlook the small mistakes that can actually set them back by a couple of steps along the journey to achieve the pre-set goals. 

Finance experts compare this to chopping wood with an axe without bothering to sharpen it at regular intervals. In spite of putting in far greater efforts, there is hardly any progress visible because the axe becomes blunt after cutting the first few trees itself.

Similarly, without taking the necessary steps to safeguard your investment strategy, it will be almost impossible to sustain it over a period of time, let alone earn the returns that were envisaged in the first place. These are seven fundamental flaws that can undermine and derail your overall strategy if not checked in time.

Not having a contingency fund
What happens when you have a crisis like loss of job or being transferred to a distant place without rent? When the expenditure involved is higher than your income and basic bank balance? Obviously, you ‘break’ an investment, be it a bank fixed deposit or units in a liquid fund. This means effectively losing out on the interest, which means your investment does not provide the returns expected. A contingency fund helps you deal with such situations and ensures that you do not need to touch your investments or compromise on the returns they are scheduled to provide.

Inadequate health insurance
Life in a metro isn’t just about working hard and partying harder. Its also about dealing with the after effects that take a toll on your health. Working professionals are increasingly ending up in hospital with heart attacks in their late twenties and early thirties. Those who have taken Mediclaim for a limited sum insured would again have to look to their investments to pay medical bills. This applies to the elder generation as well. You may not be responsible for insuring them but in a crisis, you will have to bear their medical expenses.

No critical illness insurance
If you have an accident that renders you unable to continue your current job and take up wither a lower paying one or not work at all, how will you sustain yourself? Investments that have been carefully nurtured over the years will have to be liquidated in haste to just survive from day to day.

Wrong person nominated
If you nominate an elderly family member, he or she may not be alive when your investments mature. Similarly, a spelling mistake or naming someone who resides abroad most of the time, means that rolling over your investment into a new one becomes that much more difficult. You could lose out on a lot of interest; the larger the amount, the greater the interest lost.

ECS dishonoured
Electronic Clearing Service or ECS is an electronic mode of payment for transactions that are repetitive and periodic in nature. ECS is used for periodic investments in mutual funds, insurance premium, etc. Now, if for some reason you have a funds shortage in the bank account and an ECS gets dishonoured, it means a break in the investment flow. Moreover, if you neglect to pay the amount and restart the ECS, it could mean further breaks in the investment and your strategy going for a toss.

One type of investment
If you invest in 12 mutual funds, all of which are invested in the same sector as specified in the offer document (pharma for instance), your investment strategy is questionable even if you are getting great returns right now. After all, lack of diversification can leave your investments in a very vulnerable position. If that particular sector and the companies that fall within its ambit go through a rough patch, like infrastructure for instance, then your entire investment strategy could be jeopardised.

Overlooking CIBIL report errors
If your CIBIL report wrongly indicates that you have defaulted on a credit card payment or missed a few home loan EMIs and you let that pass; the next one will again reiterate that until it becomes etched in stone. Some day, when you need to raise funds for making a bigger investment, this error could be a major stumbling block.

So avoid making these mistakes and ensure that your investment strategy remains safe and secure, just like you investments.