Before you start investing, take a comprehensive stock of your financial situation - income, expenses, savings, and investments
Equity mutual funds are known to beat inflation and grow wealth over the long term. If you start early and plan well, you will be able to make your money work for you and help you achieve your goals.
Through your wealth creation journey, you are likely to do some things right and some things wrong; it is a constant learning process. But you don't have to only learn from your own mistakes. Here are some common errors that you can avoid.
Investing without an emergency fund
The only way you can plan to invest for the long term is if your short-term needs are covered. If you are going to need to dip into your equity MFs for contingencies, you are likely to constantly worry about the market. "I don't need the money for a few years so I'm not worried if the market is going down", an investor told me in a recent conversation. So make sure you have enough money set aside for your short-term needs and emergencies before starting to invest in equity MFs.
Investing without health insurance
Apart from your emergency fund, an adequate health insurance cover can provide the financial cushion you need during a medical emergency or hospitalisation. This puts your mind at rest and allows your long-term investments to grow undisturbed. Get a personal health cover for your family, as soon as you start working - even if your company provides one.
Investing without an objective
When you start your financial journey, ask yourself three basic questions; what are you investing for, in how many years do you want to realise the goal, and how much can you set aside. The answers to these questions will not only help you to determine the right investment to create wealth but also, give a purpose to saving and investing. On the other hand, if you are investing for mere returns, your behaviour will be driven by market movements and not by your financial needs and goals.
Investing in equity funds for short-term goals
Investments in equity funds experience market fluctuations on a daily basis. A dip of 4-5% is common and your investments could face a decline of even 20-30% in the short term. If you have set this money aside for a short-term goal, this could affect your ability to meet that goal. You might even end up taking out your investments at a loss because you can't afford to wait for the market to recover. Therefore match you investments to your goal horizon and don't invest in equity funds for less than five years.
Timing the market
Timing the market refers to investing or withdrawing when your returns are soaring or falling. You may have heard or read statements such as 'I will invest when the markets are doing better' or 'Returns are high, I should withdraw before the market starts falling'. Market movements are normal and over time the volatility evens out. A systematic investment plan that you start with your goal in mind will help you stay invested and focused on the target.
Before you start investing, take a comprehensive stock of your financial situation - income, expenses, savings, and investments. Then, identify your goals and the suitable wealth creation instruments, track your progress, and stay the course.
The writer is founder & COO, Scripbox
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