- Chasing high-priced IPOs: Avoid flocking to the IPO market, without realising that the primary market can be riskier than investing in the secondary market. Also, compare valuations with listed companies from the same industry.
- Falling into the New Fund Offer (NFO) trap: A low NAV (Net Asset Value) of NFO doesn’t make it cheap. Hence, it is best to avoid an NFO if there is already a similar scheme with a track record. Go for it only if it is a new or unique scheme and you understand how it will work. Fancy funds don’t always add value.
- Not adhering to Asset allocation: In bull markets as the value of equity portion goes up, investors tend to increase their equity exposure. Whereas they should actually be doing the opposite.
- Betting on hot stocks/ thematic funds and concentrated portfolios: Investors not only start buying stocks after they become hot, but they also pour money into mutual funds schemes that have done well in the recent past. Concentrated portfolios are more volatile and very risky and having a well diversified portfolio is very important, especially when the equity market risk is high like now. A concentrated portfolio can hit you badly when the theme changes and the market turns its direction.
- Shifting from mutual funds to direct stocks: After they make money in bull markets, some investors start thinking that they can beat experienced fund managers and shift their fund portfolios to direct stocks. The sudden spurt in the number of demat accounts is a testimony of this. But this can be a grave mistake. Never misunderstand the bull market successes as your investment skill. Bull market will be followed by bear markets and that will be the real test. Is the current bull market making you invest in overpriced stocks? You should sell them instead, as valuations seem stretched.
- Resorting to leveraged and intra-day trading: Lured by the success stories of a few, some investors are getting into the highly risky arena of derivatives and day trading. These are high risk games and it’s better to stay away. Also, at these higher levels, even seasoned traders are reducing their leverage.
- Not booking profits: A common mistake of retail investors is not booking profit in bull markets. Maybe, because as the markets rise, the risk perception of the individual undergoes a change. Change in the risk profile is a common phenomenon during bull and bear phases. The same person who avoided risk during bear markets usually takes high risk during bull markets due to high historical returns. It is foolish to expect similar returns in the coming years.
- Expecting future returns to match the past: Rather than being greedy in bear markets and fearful in bull phases, most investors do exactly the opposite. This optimism can have grave consequences. As and when markets make major directional moves, rebalancing portfolios could be a better strategy.
- Completely exiting the equity market: Just like not booking profit is one mistake, getting fully out of the market due to valuation concerns can also prove counterproductive. Hence, the ideal step is stick to your financial goals, risk appetite, review and continue to rebalance your portfolios as per your investment horizon.
