6 Biggest Investment Mistakes Most Make

The biggest investing mistakes happen when markets are doing well. Ironic, isn't it? 

After having studied investment patterns and decisions, I have jotted down the 6 biggest investment mistakes that most make but are least aware of.

Read on.

1. Shift from diversified funds to index funds

The relative underperformance of actively managed funds is due to the high degree of polarization in stocks forming the large-cap universe.

When only a small number of stocks skew the index return, most active funds will struggle to outperform the index. 

You may be wondering that if low-cost index funds are outperforming, shouldn't you shift out of actively managed funds and avoid paying the higher fund management charges?

No, because the Indian market is still not at a stage where index funds will consistently beat active funds.

2. Stopping SIPs because funds are down

You can make the most of the volatility of the marker when the funds are down by effectively fetching more units at lower prices for the same amount.

Over a period, SIPs will average out your cost and generate inflation-beating returns. 

This is the simple key to building wealth.

If you are a mutual fund investor, regular investing is a better strategy than timing the market. 

You are likely to make more money if you continue your SIPs irrespective of market movements rather than let market sentiments affect your decisions.

3. Shifting from debt funds to fixed deposits

Shifting from debt funds to fixed deposits will not be beneficial for you because although bank deposits give assured returns, they are not tax-efficient.

The entire interest earned from bank deposits is included in your income for the year and taxed at the applicable slab rate.

The post-tax return will be much lower if you fall in the higher tax brackets.

Instead, you should park some money in short-term or low duration debt funds and fixed maturity plans as bond funds are far more tax-efficient. 

If held for more than 3 years, the gains are treated as long-term capital gain and are taxed at 20% along with indexation benefit. 

4. Starting equity SIPs for short-term goals

Some may consider initiating a SIP in mid-cap funds to gain from the volatility. This is fine so long as you are not investing in these funds for short-term goals or hunting for quick gains.

You should commit to at least a 5- year horizon to benefit from the SIP. 

At a fundamental level, the fund must align with your risk profile and the time horizon. 

If you need money in 3 years, you shouldn't be in equity funds.

5. Investing in mutual funds for dividend

Some mutual fund houses have pushed their equity-oriented funds as a source of regular dividend income for investors.

Gullible investors do not realize that dividend from a mutual fund is only their own money coming back.

Dividend is the opium of mutual fund investor. For too long, it has been used as a bait to lure in investors.

6. Turning too bullish on stocks 

Investors who are less confident tend to make fewer mistakes than those who are brash and carefree. 

If you have made good money in the stock market, it's time to re-balance the portfolio and restore the initial asset allocation. 
But, a lot of investors tend to become their own worst enemies and turn to panic buying. 

Behavioral scientists say that human biology plays its own tricks here. 

When a trade goes right and you make money, the brain releases dopamine in the body which makes the individual feel positive and more confident of doing well.

The best way to protect your portfolio is by deciding on a percentage balance between equity and debt and sticking to it by periodically shifting money away from the one that becomes high to the one that becomes low.


Investors often sell mutual funds for the worst possible reasons. The right time to actually sell is when you need the money to meet a financial goal.

Investing plays a very pivotal role in the wealth creation process. 

There's a famous Chinese adage which is very true even for investing - The best time to plant a tree was 20 years ago. The second best time is now.

Start your investments now and enjoy the magic of the power of compounding!