A classic proverb states that “there is no use running if you are on the wrong road”. While this time-tested wisdom predates modern finance and investment strategies, the core principle holds perfectly true in today’s investment world.
Experts are of the opinion that making an investment just for the sake of it is not a good idea and that the nuances of investing are more important than just putting your money in the markets.
“The biggest mistake is confusing market participation with wealth creation,” says Ajay Kumar Yadav, Group CEO & CIO, Wise Finserv. Thus, opening a demat account, buying a stock after watching a video, investing in a mutual fund because it gave the highest one-year return, or applying for an IPO (initial public offering) because everyone is talking about it, does not automatically mean wealth is being created.
Five common mistakes retail investors often make
First, they without a defined goal. The same money may be mentally tagged for retirement, child education, emergency needs and short-term gains. When the purpose is not clear, the decision becomes emotional.
Second, many investors chase recent performance. If small caps have done well, they suddenly want only small caps. If gold has rallied, they want gold. If global tech has performed, they want NASDAQ or AI-linked funds. This usually means they enter after a major rally, when risk is already high.
Third, investors underestimate valuation and risk. A good asset can still be a bad investment if bought at the wrong price or with the wrong expectation.
Fourth, many investors churn their portfolios too often. They move from one fund to another, one theme to another, or one stock to another because of news, social media or short-term underperformance. This damages compounding.
Fifth, they do not respect asset allocation. Most retail investors decide product first and portfolio later. Ideally, it should be the other way around. First, decide how much should be in equity, debt, gold, global allocation or other assets. “Then select the right products,” says Yadav.
“The typical mistake that most retail investors make is deciding what to invest in, based upon how they feel, rather than their objective financial goals,” says Rohit Mahajan, Founder & CEO, plutos ONE. Markets are driven by hype, social media trends or other things happening that influence the price of an asset rather than engaging in sound asset allocation and research.
“A common mistake is getting attracted to investments that promise extraordinary returns,” says Jai Bajaj, MD & CEO, Bajaj Capital. As a thumb rule, if an opportunity appears too good to be true, scrutinise it. Investors should ask the right questions, understand the source of returns, and evaluate whether the risks are being adequately disclosed.
“With reference to, firstly, there is the herd mentality which leads to entering the race when it could be too late and secondly, the fascination of buying stocks, which are through borrowed thoughts, tips and not researched or managed by themselves,” says Mohit Bagdi – Head of Investment Research & Founding Member of MIRA Money. Leave the disciplined investing for a moment, and the above two points lead to a lot of wealth destruction, which at times takes a lot more disciplined investing, time and effort to just get that money back.
Thus, experts stress that there is a world of difference between rebalancing your portfolio and churning it. The former is good, the latter not.
Investment means putting money into an asset with a clear objective, time horizon and expected role in the portfolio.
Investment churn means buying and selling mainly because of excitement, fear, short-term news or peer behaviour.
There is a big difference between reviewing a portfolio and disturbing a portfolio. Review is healthy. Churn is harmful.
For example, if an exits a fund because the fund manager has changed, the mandate has changed, the fund has consistently underperformed its benchmark and category, or the portfolio no longer fits the investor’s goal, that is a valid review.
But if the investor exits only because another fund has done better in the last six months, that is usually churn.
Similarly, moving money from equity to gold only because gold has rallied, or moving from large cap to small cap because small caps are trending, may look active but can actually weaken the long-term portfolio.
“The investor should ask one question before every switch: Am I improving my portfolio, or am I only reacting to noise?” says Yadav.
It’s very simple to avoid mistakes – you (investor) need to know your priorities.
“Investing with purpose means every rupee has a job,” advises Harsh Gahlaut, Co-founder & CEO, FinEdge. Money needed for a child’s education in three years cannot be treated like retirement money needed 20 years later. Investment churn occurs when investors keep reacting to market news, trends, short-term performance, or peer comparisons. Purpose creates patience; churn creates restlessness and interrupts compounding.
Sustainable wealth is rarely the result of rushing towards the highest returns. “It is built over time and through hard work, centred on asset allocation, goal-based investing, and consistent portfolio management,” says Bajaj.
Timeless tips for wealth creation
Three timeless principles have guided generations of investors to wealth creation:
● Asset allocation determines the risk appetite.
● Goal-based investing shows why the investor is taking that risk.
● Portfolio discipline determines whether the investor will stay invested to achieve the goal.
Investing is the act of allocating money for a long-term goal and allowing enough time for the investment to compound. Investment churn is defined as the act of buying and/or selling an asset (or multiple assets) because of daily market headlines, trends, or FOMO (fear of missing out).
The investor may overlook this seemingly obvious fact, but churning (rather than rebalancing) your investment portfolio has its costs.
Churning investments results in increased transaction costs, higher taxes on capital gains, and behavioural errors, and churning overall negatively impacts an individual’s total return over time.
“Many individuals do not recognise that activity does not guarantee progress; rather, activity typically does not lead to the accumulation of wealth over time. Successful investors will concentrate their efforts on owning quality assets that support their financial objectives and will only make changes to their overall portfolio when their financial objectives, risk tolerance, and/or target asset allocation changes,” says Mahajan.
“Simply investing is not enough—it needs to be thought through,” adds Bajaj.
Churn and the various asset classes
Churn is most visible in equities because prices move every second and social media content around stocks is very high. But it is not limited to equities.
In mutual funds, investors often chase last year’s best-performing fund or category. In gold and silver, investors enter after a strong rally because they feel they are missing out.
In bonds, investors may look only at coupon or yield and ignore credit risk, liquidity risk and taxation. In IPOs, many investors apply because of listing gain expectations rather than business quality or valuation.
Sebi’s study on derivatives showed how dangerous short-term trading behaviour can become. Sebi reported that 93 per cent of individual traders incurred losses in equity F&O between FY22 and FY24, with aggregate losses exceeding ₹1.8 lakh crore over three years, as highlighted by Wise Finserve.