Making investment decisions is not as easy as buying grocery. It involves a well laid out process to understand one's need, goals, risk taking ability, priority of goals, income and expenses. After due consideration is given to all these points, an effective financial plan can be framed to achieve the listed goals. However, investors do not realise the importance of having gone through a detailed financial planning exercise and as such commit some common investment mistakes.

Some of the common investment mistakes are listed below which the investors should avoid.
 

1. Making investments based solely on thumb rules
   
   There is a plethora of investing thumb rules doing the rounds. For example, the equity component in an investor's portfolio should be 100 less his age; hence, a 20-Yr old investor's equity investments should account for 80.0% of his portfolio. Similarly, it is stated that an investors' risk appetite is inversely proportional to his age; hence as the investor ages, his ability to take on risk diminishes.
   
   While thumb rules can be used to broadly understand any concept, making investments based solely on the same would be inappropriate. At PersonalFN, we have over the years met several investors who are well past their sixties, but their risk appetite could only be termed as high. Similarly, we have also interacted with investors in their twenties whose aversion for taking on risk was notable. Had the aforementioned investors made investments using thumb rules, they would have ended up with unsuitable investment portfolios.
   
   The learning: Investors can use thumb rules to understand a concept, but they shouldn't blindly adopt the same. Instead, investors need to find out if that thumb rule is applicable to them. There could well be a situation wherein the investor turns out to be the proverbial exception to the (thumb) rule. Such a scenario only reinforces the need to engage the services of a competent financial planner and have access to customised investment advice.
    
2. Conducting tax-planning as a stand-alone activity
   
   The conventional way to conduct tax-planning is, in a rushed manner during the eleventh hour (i.e. at the last minute). Even worse is the fact that not too much thought is put into the process; often, the usual suspects i.e. small savings schemes and insurance are deployed. What investors fail to realise is that tax-planning is as much about contributing to the financial goals as it is about reducing the tax liability. In other words, instead of conducting it in isolation, tax-planning needs to be integrated into the investors' financial planning activity.
   
   An example should help clarify this. Consider an investor who invests Rs 70,000 every year in his Public Provident Fund (PPF) account as a part of his (Section 80C) tax-planning. Assume that the rate of return is unchanged at 8.00% per annum over the 15-Yr investment horizon. Effectively, the investor would accumulate a corpus of Rs 23,54,388 on maturity.
   
   However, the investor in question is a risk-taking individual. As a result, he could have invested the aforementioned sum in a market-linked avenue like equity-linked savings schemes (ELSS) instead of PPF. Assuming that the ELSS investments yield a return of 12.0% CAGR (it must be noted that ELSS investments don't offer assured returns, however the aforesaid growth rate would be plausible in the context of a well-managed ELSS) over the investment horizon, he would have accumulated a corpus of Rs 29,22,730. More importantly, the investor wouldn't have contradicted his risk profile in the quest for higher returns; in fact, he would have gained higher returns by adhering to the same.
   
   The learning: First, all the principles of financial planning are equally applicable and relevant to tax-planning as well. Second, tax-planning should fit into the investors overall investment plan and not be conducted in isolation.
    
3. Leaving money unutilised in a savings bank account
   
   Often investors are guilty of sitting on money. Typically, the earnings from salary and business income are deposited into a savings bank account. However, most investors fail to put the money to good use i.e. they fail to gainfully invest the money. And unutilised money is never a good thing.
   
   Of course, liquidity is important as well. Hence an appropriate amount needs to be set aside for meeting regular expenses, medical emergencies and contingencies. Any surplus over and above should be invested in appropriate investment avenues in line with the investors risk appetite and investment plans.
   
   The learning: Investors shouldn't stash their money in a savings bank account. Instead, they must put the money to work and ensure that it plays a part in helping them achieve their financial goals. A simple statistic should convince sceptics. While money lying in a savings bank account will earn a return of around (pre-tax) 4.00% per annum at present, a similar investment in a 1-Yr AAA rated (indicating the highest degree of safety) fixed deposit will yield a return of (pre-tax) 8.50% per annum.

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