Did you know that 6 out of 10 adults admit that investing is confusing, and they are often surrounded by misconceptions when it comes to choosing an investment product? Most of them want to create long-term wealth but desist from investing and consider it a daunting endeavour.
Let’s bust 12 common myths of investing to help you make informed investment decisions.
Myth 1: You Need a Lot of Money to Start Investing
There is no such thing as the right time or right amount of money when it comes to investing. Investing regularly over time, even in small amounts can add up and compound to create significant wealth in the future rather than waiting for your disposable income to go up to start investing. Remember, it’s never too early or too late to start investing, regardless of the amount of money you have.
Myth 2: Keeping Money in a Bank is the Safest Way to Grow Wealth
Bank accounts like savings and fixed deposits provide safety and liquidity, but they usually offer very low interest rates, often barely enough to match or exceed the country’s inflation rate. This means that the purchasing power of your money may decrease over time, making the real return on these accounts almost negligible. For example, if inflation is at 6% and your bank is offering 4% interest, your money loses value in real terms.
Moreover, in India, if a bank fails, the Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees a maximum insured amount of Rs 5,00,000 per depositor, even if you have significantly more money deposited. This limit creates additional risk for large deposits.
While banks are suitable for short-term needs or emergency funds due to their safety and quick access to cash, they are not ideal for wealth creation. Other investment options like mutual funds, stocks, equities, or bonds, which generally offer higher returns, are better suited for growing wealth over the long term. Bonds are considered a relatively safe way to growth wealth.
Myth 3: There Should Be a Reason to Invest
While it is true that investing should be done with a purpose in mind, it is still rewarding to consistently invest, even without a specific goal in mind, investing helps you build wealth over time by taking advantage of compound interest and long-term market growth. It ensures you’re steadily growing your financial resources, giving you flexibility for future opportunities or unexpected needs.
However, it is a good strategy to do an annual check-up to reassess your risk appetite, rebalance your portfolio, diversify your investments, and seek expert advice if needed.
Myth 4: Invest in Big and Famous Companies
Investing in big and famous companies is not necessarily a foolproof investment strategy. Good reputation of a company does not always guarantee good returns or the safety of capital. Large organisations may be less agile giving slower growth, leading to missed opportunities compared to smaller, more dynamic companies.
Thus, it is necessary to diversify across companies considering financial health, growth potential, management, and industry trends while ensuring that these investments align with the risk appetite and expected returns on your portfolio.
Myth 5: Only After a Certain Age Should You Begin to Invest
Age is not a barrier to investing; in fact, the earlier you start, the better. Investing early allows you to take on more risks and maximise the benefits of compounding. Ideally, as soon as you begin earning an income, a portion should be allocated towards investments. Starting early enables you to accumulate a substantial corpus for the future by fully leveraging the power of compounding.
Myth 6: Follow the Influencers and Financial Gurus to Invest
Yes, financial influencers on social media channels are telling you about new investment schemes, but how reliable are they?
Many of their recommendations can be dubious and primarily serve their own interests, especially when affiliate commissions are involved. In light of recent pump-and-dump schemes, SEBI has issued a public notice urging the investors to avoid unsolicited paid stock tips and recommendations on platforms like Telegram and YouTube. Emphasising the importance of conducting thorough research and seeking advice from reliable sources before making any investment decisions.
Myth 7: Timing the Market Is the Key to Investment Success
Timing the market refers to shifting the money between investments or withdrawing money from the market based on predictions or market assumptions. Timing the market strategy is extremely risky for an average investor without knowledge of the underlying fundamentals.
This strategy often leads to emotional decision-making, panic selling, and missed opportunities. Experts admit that consistent-correct prediction of the movement of the market has never been possible.
Myth 8: Investing Is Risky
Risk is inherent to investing. The degree of risk depends on various factors such as asset category, the underlying asset, investment structure, tenure, sector, and external factors.
- Investing in futures and options is riskier than investing in equities.
- Investing in equities is riskier than investing in debt securities.
- Investing in a single stock is riskier than investing in a diversified portfolio of stocks.
While investing does carry some level of risk, labelling investing as risky and refraining from it invalidates long-term wealth creation. Investors should also do their due diligence before investing, understanding the risks involved.
Myth 9: Diversification Is Good, so Overdo It!
While diversification of the portfolio is recommended to distribute the risk across various asset classes and investment opportunities, ‘over-diversifying’ the capital results in diluted returns and increased transaction costs. The trick lies in achieving an optimal mix of diversification and concentrated investments.
Diversification of a portfolio amongst liquid assets, equities, debt instruments, short-term and long-term investments, real estate, alternative fixed income instruments, gold, etc., should be done based on tenure, risk appetite, and goals of an individual. Hence there is no one-fits-all rule for diversification.
Myth 10: You Should Pay Off All Debt Before Investing
Paying off high-interest debt is definitely important, but you don’t need to eliminate all your debt before you start investing. Some debts, like mortgages or student loans, usually have lower interest rates and the cost of borrowing money for these loans is less expensive over time, making it easier to manage and pay off while still allowing for the possibility of investing. If you wait too long to invest because you’re focused on paying off these lower-interest debts, you might miss out on the benefits of investing early.
When you start investing early, your money has more time to grow through compounding. A good strategy is to pay off your high-interest debts while also gradually putting some money into investments.
Myth 11: Investing Is Only for the Wealthy
Investing isn’t just for the wealthy, it’s a crucial way for people to build wealth over time. With options like SIPs or robo-advisors, anyone can start investing regularly with small amounts of money. These tools make investing accessible to people of all income levels. Many people mistakenly believe that investing requires a lot of money, which stops them from benefiting from the long-term growing potential, that even small and consistent investments can offer.
Myth 12: Investing Requires a Lot of Time and Attention
It’s a common belief that successful investing demands constant monitoring and active decision-making. While this is true for certain strategies like day trading or individual stock picking, there are more time-efficient options available. Passive investment vehicles such as index funds, ETFs, and SIPs allow investors to automate investment amount and minimise the need for daily involvement.
SIPs are a popular choice for those with busy schedules. These are like mutual fund investments where your money is pooled and managed by professional fund managers who make allocation decisions on your behalf. However, it’s important to note that while SIPs and other passive options reduce the need for constant attention, initial research is still important from your end. You need to select the right funds, understand the risk profile, and assess how they align with your long-term goals.
Conclusion:
Understanding the truth behind common investment myths is essential for making informed financial decisions. Remember, the key to successful investing lies in education, research, discipline and the willingness to start investing, regardless of your earning. Embrace the journey of investing, and you may find it to be one of the most rewarding aspects of your financial life.
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