In general, our investing decisions are shaped by the following factors:

1. Having herd mentality

When people watch their neighbors, friends and colleagues making money in the particular asset class (Stock Market, Gold, Real Estate), they feel left behind. Then they start doing the same thing in a bid to make money, which is the biggest mistake they make. One must remember that everyone has some plans and strategies about their investments. Therefore, copying their investment strategies may not suit you and you might even end up losing substantial money. It is in your own interest, therefore, not to follow others.

2. Unrealistic Expectations

We as human beings are greedy by nature and are never satisfied - be it our compensation or investment return, we want more of everything. This sometimes makes us set unrealistic targets which are unachievable. Therefore, it is important for us to set realistic targets.
For example Investor looking for 20% return from Equity Market in 1year.

3. Focusing on past performance

It is a very common perception that because an asset class has done well in the past one year, it's the best asset to invest in. Retail investors do not realise that often the best performers will underperform the market in the future because their optimistic outlook has already been priced.
Don't go after hot sectors that are currently producing high returns. Don't let greed drive your investment decisions. Look forward to see whether the gains produced in the past can get repeated or not. Short-term trends of the past might not get repeated in the future.

4. Emotion

While there is need for investors to focus on making logical, careful decisions that support a long-term goal like retirement, a person's emotions can cloud his investment decisions, leading to choices that are not in his best interest. For example, when markets remain bearish for a long time, some investors lose patience and sell their stocks at rock-bottom prices, incurring losses. On the other hand, "sometimes some people buy shares of unknown companies without really understanding the risks involved. Thus, instead of creating wealth, such investors burn their fingers very badly the moment the sentiment in the market reverses.
Therefore, don't let either fear or greed cloud your judgment.

5. Chasing Returns

Some Investors keep on churning their portfolio in order to identify the best performing fund. One has to understand that it's very difficult for an asset class to consistently deliver the high returns. Churning your portfolio will result in very ordinary returns. We suggest investors to identify their objective and stick to it despite of market conditions.

Don't spend too much time on deciding where, how and when to invest. The faster you invest money, the more it earns.
A delay in making an investment can lead to a loss. The accrued interest on the investment for the duration of the delay can have a significant effect on the net returns.

If an investor starts an investment of Rs 5,000 in a fund that gives 12% returns, he will accumulate Rs 1.77 crore in 30 years. But if he delays his investment by just 3 years his corpus will be Rs 1.21 Cr, smaller by 56 lakh. 
Many young earners don't start investing because they believe their income is low & they can start investing later. But this is not true. With the passage of time, Individual responsibilities grow & his ability to take risk gradually decreases.  If invested late when the risk appetite lowers due to the newer financial goals and other responsibilities, Individual investments may get overshadowed. An Investor can Start Investment with the amount he is comfortable with, with the passage of time one can increase the investment amount.

Investing is not just about picking winners, but also about avoiding mistakes. Retail investors can be better off if they avoid making the following mistakes.

Overconfidence

A bull market makes retail investors believe that they are geniuses - after all, anything they put money into goes up. This overconfidence in their own abilities leads to a complete disregard of the risks involved.
Every new generation that invests in the market ignores past experience. These new investors wrongly believe that stock prices only go up.
Don't be overconfident and don't start believing that you have superior skills compared to the market. Recognise that in a bull market you are benefiting because the whole market is going up. If those around you are getting unrealistically optimistic, start managing your risk accordingly. Remember that sometimes markets do come crashing down.

Over enthusiasm to trade

Good batsmen realise that some balls outside the off-stump should be left alone. Similarly, professional investors realise that sometimes its better to just stand still than to rush into a stock. Retail investors often make the mistake of "flashing outside the off-stump" because they cannot resist the temptation to trade in every opportunity. And, like an inexperienced batsman, they suffer the same fate.
Too much trading will lead to a lot of churn, which results in missing out the real returns. Some of the world's best investors follow a buy and hold strategy - you should too.

Missing the benefits of compounding

Albert Einstein has said that compounding of capital is the 8th wonder of the world because it allows for the systematic accumulation of wealth. Even though any one in class 5 could tell you how compounding works, retail investors ignore this basic concept.
Compounding of capital can benefit you only if you leave your money uninterrupted for a long period of time. The sooner you start investing, the bigger the pool of capital you will end up with for your middle aged and retirement years.
Don't wait to start investing only when you have a large amount of money to put to work. Start early, even if it's with a small amount. Watch this grow to a very large amount with the passage of time.

Worrying about the market

Retail investors are obsessed with the question "Where do you think the market will go?" This is a wrong question to ask. In fact, no one knows the answer.
The right question to ask is whether the fund in which you are investing, is going to give good returns 10 years from now or not? Don't take a view on the market, take a view on long-term industry trends and how your chosen companies can create value by exploiting these trends.

Timing the market - Around 99% of investors will fail in this strategy

Its very difficult to time the market, i.e, be smart enough to buy at the absolute bottom and sell at the absolute top. Professionals understand that timing the market is a wasted exercise.
Retail investors always wait for that elusive best opportunity to get in or to get out. But by waiting they let great investment opportunities go by. You should use systematic or regular investment plans to make investments. You'll have to make fewer decisions and yet can accumulate substantial wealth over time.

Selling in times of panic

The best opportunity to buy is when the markets are falling and there is fear in the minds of investors. Yet, many retail investors do exactly the opposite. They sell when the markets are falling and buy only when the markets are high. This way they end up losing twice - by selling low and buying high, when they should be doing exactly the opposite.
If nothing has changed about the long-term outlook for the company that you own, then you should not sell this company's stock. Use this opportunity to buy more of the same stock in falling markets. Some of the world's biggest fortunes were made by buying when others were selling in panic.

Focusing on past performance - Its like driving forward while looking backwards

It is a very common perception that because a stock has done well in the past one year, it's the best stock to invest in. Retail investors do not realise that often the best performers will underperform the market in the future because their optimistic outlook has already been priced into the stock.
Don't go after hot sectors that are currently producing high returns. Don't let greed drive your investment decisions. Look forward to see whether the gains produced in the past can get repeated or not. Short-term trends of the past might not get repeated in the future.

Diversifying too much will kill you - Investing is all about staying alive

Beyond a point, having too many names in a portfolio can be counterproductive. You might end up duplicating, or end up taking too much exposure to a sector. Over-diversification can upset your portfolio, especially when you have not done enough research on all the companies you have invested in.
If you are an active investor in the stock market, maintain a manageable portfolio of 15-25 names. Instead of adding new names to this portfolio, recognise ideal ones. Then back them with more capital. In the long run, this will produce better returns for you than adding another 20 names to your portfolio.
Investing is all about patience and discipline. By avoiding mistakes you can improve the long- term performance of your portfolio, whatever the economic conditions prevailing in the market.

Schemes which do not invest in Equity or Equity related instruments are termed as Debt Funds, These funds do not invest in share market, these schemes invest in Fixed return yielding instruments like Corporate Bonds, Commercial Papers, Treasury Bills, Government Securities and Debentures.
Relatively these schemes are less risky than equity market & are suitable for investors looking for safe & consistent returns. Any risk averse investors looking to invest in mutual funds can opt for these schemes.

Types of Debt Mutual Fund

• Liquid Funds or money market funds are a variant of debt schemes that invest only in debt securities where the moneys will be repaid within 60-days. These are widely recognized to be the lowest in price risk among all kinds of mutual fund schemes. These schemes can also be considered as alternative to savings bank account. Thus, these schemes are ideal for investors looking to park surplus money for short duration.
• Fixed Maturity Plans (FMPs) are a kind of debt fund where the investment portfolio is closely aligned to the maturity of the scheme. These schemes are close ended schemes & have fixed maturity date.
• Diversified Debt Funds on the other hand, invest in a mix of government and Non government debt securities such as corporate bonds, debentures and commercial paper. These schemes are also known as Income Funds. Depending upon the maturity of securities within the scheme, these are further classified as Short Term Income Fund, Medium Term Income Funds and Long Term Income Funds. Short Term Income Funds have securities maturing between 6 months - 3 years. Medium Term Income Funds have securities maturing between 3 years - 5 years. Long Term Income Funds have securities maturity from 5 years up to 30 years.
• Gilt Funds invest in only treasury bills and government securities, which do not have a credit risk (i.e. the risk that the issuer of the security defaults). But Gilt funds are highly volatile funds high level of caution is advisable before investing in Gilt funds.

Consider the following while choosing an appropriate Debt Mutual Fund -
1. Modified Duration - Higher the modified duration, higher will be the Volatility,
2. Portfolio Quality - better the Portfolio Quality, safer will be the fund, always choose a fund with AAA or AA rated funds in portfolio
3. Yield to Maturity (YTM) - Higher the YTM, better the fund.

Here are a few personal finance tips that young professionals would well to be aware of:

1. Insurance:

First step towards financial planning is to make sure you have adequate life Insurance cover. You can choose HLV (Human Life Value) calculator to ascertain how much insurance is required.
Young professional can opt for the Term plan, & at a young age the premium amount will be very affordable.

2. Identify Your Goals:

Split your goals into three categories: short-, medium- and long-term goals. Then list each one clearly, along with the number of years to achieve each, and the exact amount you will need. Once you have penned down your goals, you will be able to determine how much and for how long you will need to invest.

3. Asset Allocation:

Don't put all your eggs in one basket. You must get your asset allocation right. It is not wise to have all your assets in equities even if you are very young.
Invest in Sovereign Gold Bonds, REITS, INVITS, NPS apart from Mutual Funds & Fixed return instruments.

4. Maximize Tax Saving:

Why pay dual tax on same income. First we pay tax on our income, and then we invest the amount in instruments which are taxable. Invest in asset class which offers tax free returns.

5. Keep an emergency fund:

Do keep 3-6 months of your expenses in a savings account, fixed deposit or a liquid fund. This avoids eating into your savings in case of loss of employment or any emergency.

6. Consult your Financial Advisor:

Do not take advice from your friends/colleagues/ family members. Their personal experience towards a particular asset class may differ from you.
If your friend/colleague who has burnt his hands in equity market, he may never advice you to invest in Equity. Your risk appetite & requirement may differ.
Consult your financial advisor, he will ascertain your requirement and can suggest you right asset class to invest.

First time mutual fund investors are often confused about the concept of Net Asset Value (NAV) of a mutual fund scheme. Most of them wonder whether they should buy a fund with a higher or lower NAV. You cannot view a mutual fund unit like a share. There is no 'saturation point' as far as the growth of the Net Asset Value of a fund is concerned. An individual stock may get over valued if its price shoots up, but that is not the case with a mutual fund.

Is it better to buy a fund with a lower NAV?

The NAV of a mutual fund scheme is the market price or the value of its assets minus its liabilities per unit. The NAV represents the fund's intrinsic worth. Higher or lower NAV is irrelevant if the fund performance is considered.
For example, suppose you are investing in two schemes with same portfolios. One scheme has been around for a while, so it has a higher NAV. The other scheme, a relatively younger one, has a lower NAV. This means, the investor would get more number of units in the scheme with lower NAV and less units in the scheme with the higher NAV. However, both would get the same returns as the appreciation or deprecation of investments of the scheme would be same as they have identical portfolios.

Should you buy a new fund offer (NFO) priced at Rs 10?

The NFO or new fund offer, as the name suggests, is the new launch of a fund. The fund would collect money from investors first, and invest it on their behalf later. That is why it is offering units at Rs 10. An existing fund, on the other, has already made investments. Depending on its performance, the NAV would be higher or lower than Rs 10. Avoiding a scheme with a higher NAV is unwise because you are actually penalising it for performing better.

When selecting a mutual fund, an investor has to make an almost endless number of choices. Among the more confusing decisions is the choice between a fund with a growth option and a fund with a dividend option. Each type of fund has its advantages and disadvantages, and deciding which is a better fit will depend on your individual needs and circumstances as an investor.

Growth option

Under growth option, dividends are not paid out to the unit holders. Income generated to the Unit holders continues to remain invested in the Scheme and is reflected in the NAV of units under this option. Investors can realize capital appreciation by way of an increase in NAV of their units by redeeming them. The growth option is not suitable for the investor who wishes to receive regular cash payouts from his/her investments.
Investor looking to create wealth with a longer time horizon should opt for the Growth option.

Dividend payouts

The dividend reinvestment option is quite different. Dividends that would otherwise be paid out to investors are reinvested in the scheme to purchase more units in the fund. Again, cash is not paid out to the investor when dividends are paid by the fund. Instead, cash is automatically used by the fund Manager to buy more units on behalf of the investors.
Usually Investors who doesn't have immediate cash flow requirement, but in future can require regular cash flow opt for dividend reinvestment option.

Investor can change the option from Dividend reinvestment to dividend Payout based on his requirement, without paying any charges/exit load.

For e.g : Investors planning for Child education, looking for quarterly cash flow after 3 yrs, can opt for dividend reinvestment option now & later on when cash flow is required can opt for dividend payout. With respect to fund performance Growth Option & Dividend payout/reinvestment delivers the same returns. Since the portfolio of the scheme is same there is no difference with regard to fund performance. Returns of both the options will almost remain the same.

A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

How SIP work?

A SIP is a flexible and easy way to plan investment. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme. You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

Rupee-Cost Averaging

Most investors remain skeptical about the best time to invest and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.

Power of Compounding

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." The rule for compounding is simple - the sooner you start investing, the more time your money has to grow. With a small contribution on a monthly basis, investor can accumulate a large corpus & can achieve their desired objective.

Benefits of Systematic Investment Plans

1. Disciplined Saving - Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.
2. Flexibility - While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.
3. Long-Term Gains - Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.
4. Convenience - SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.

SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments

Planning your taxes is an integral part of your financial planning. Sec 80C of the Income Tax Act allows you to claim deductions upto 1.50 lakhs from your taxable income by investing in certain investments. One of the most popular Sec 80C investments is in tax saving mutual funds or Equity Linked Savings Scheme (ELSS). This is an equity diversified fund and investors enjoy both the benefits of capital appreciation, as well as tax benefits.

This type of mutual fund has a lock in period of 3 years from the date of investment. This means if you Invest your investment will be lock in for 3 years. If you start a Systematic Investment Plan in an ELSS, then each of your investments will be locked in for 3 years from the respective investment date.

Investors can exit ELSS by selling it after 3 years. Compared to traditional tax saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and bank fixed deposits; the lock in period of an ELSS fund is much lower.

While ELSS investment is locked in for 3 years, PPF investments are locked in for 15 years, NSC investments are locked in for 6 years, and bank fixed deposits eligible for tax deduction are locked in for 5 years. As ELSS is an investment in equity markets and investing in this for a long term can give you better returns compared to other asset classes over the long term.

Comparison of Public Provident Fund (PPF) & Equity Linked Saving Scheme (ELSS)

If you have invested 1 lakh rupees every year in PPF & ELSS scheme, after 15 years your valuation in PPF account would be 30.32 lakh, whereas ELSS valuation would have been grown to whooping 1.20 Cr.

Best mutual fund scheme does not mean the best in returns, but the one best suited to your risk profile and goals and the one that is good in its peer group. The biggest mistake that mutual fund investors make is selecting mutual funds only on the basis of performance and that too just the recent performance.

The best scheme for one investor might not suit the other investors. Investors shouldn't try to accumulate a large number of schemes they believe are good schemes.

There are some investors who consider only the star ratings given by various research agencies. These star ratings can be one of the factors to look at, but there are many other parameters that one should look into before finalising a mutual fund portfolio.

1. Returns

Do not add funds that do not match your risk profile. Most mutual fund investors have an affinity towards top-performing schemes. Without bothering to check details, investors simply add top-performing schemes to their portfolio. This is a big mistake. A conservative investor would find the best performing mid or small cap fund too hot to handle during a prolonged bear phase in the market. The scheme may be brilliant, but it simply doesn't make sense to own it if it doesn't match your profile.
 

2. Ratio analysis

Alpha, Beta, Standard Deviation and Sharpe Ratio are few tools to analysis the fund performance. Alpha tells us what extra the fund manager has generated out of a given portfolio in comparison to benchmark. Standard deviation measure the Volatility in fund returns. Beta Measures the risk & Sharpe ratio is a tool to analyse Risk Adjusted return.

3. Fund manager tenure and experience

Fund manager plays a very important role in the fund's performance. Though it is a process oriented approach but still fund manager is the ultimate decision maker and his experience and view point counts a lot. You should know who is the fund manager of the scheme and what is his past track record.
You should also look at the performance of other funds which he is managing. If the fund manager of the scheme has recently been changed, don't panic.  Just keep a watch on his performance by looking at alpha and quarter to quarter performance.
If you find that due to change in the fund manager there is considerable effect on the fund's performance which does not suit your risk appetite then you may make a decision to exit.

4. Performance Ranking

More than the recent or long term performance of any scheme its ranking among peers should be looked at. To find out the ranking you need to check out the quartile ranking which will show how the fund has performed quarter on quarter among its peer group. In quartile ranking each quartile comprises of 25 percent of peer group schemes.
So one may select the scheme which has remained in top quartile most of the time. If at all you find your scheme going below 3rd quartile in a couple of consecutive quarters it hints that time has come to exit the scheme. You can find these rankings from the factsheets of various AMCs and also on some mutual funds research websites.

5. Scheme asset size

Your selected scheme assets should also have a considerable AUM. Less AUM in any scheme is very risky as you don't know who the investors are and what quantum of investments they have in this particular scheme. Exit of any big investor out of any mutual fund may impact its overall performance very badly and the remaining investors in a scheme will have to bear the impact If the fund size is too large, it's also risky.
Hence, it is usually recommended that while choosing a fund, you should go for the one whose assets under management (AUM) are approximately the same as the category average.