1. Not having a goal or a plan
How can one be lost without a destination? How can one judge the sanity of a financial decision when he does not know where he is and where he wants to be? Not Knowing, why you are investing in itself is the biggest mistake of investing.
Before investing, one should be able to identify a goal that is specific, measurable, reasonable and time bound. “I want to invest” isn’t a goal but just a wish.
2. Investing only to save Tax
Rushing to put money into PPF or NSC or LIC endowment polices in the month of March to save tax isn’t a good idea. Saving tax shouldn’t be a goal but a by-product of your investment plan. A plan must minimize the tax outgo and not try and save every penny of it.
For example, recommending someone to take a home loan to save tax is just absurd.
3. Taking on too much Debt
If you are paying more than 35% of your take home income in EMIs, you most probably will be working until you are 65 and yet live a poor retirement life.
If you look at the history, debts have brought down great businesses to ground and for common people like us, it can topple our finances in just the matter of weeks.
4. Having unreasonable expectations
Investing in equities will not make you rich. It will just give you an opportunity to compound your money at a rate that is higher than the traditional investments.
Over a 15+ year time frame, one can reasonably expect a post-tax return of 12% from equities.
5. Ignoring Inflation
As Indians, we lose less money gambling and more by inflation. We have an average inflation rate of 6.9% in last 37 years. So if you have earned any less than this number over the last 30 years, you would have lost money.
If you invest 1 lakh today and after one year you get back 106,900, effectively you earned nothing.