5 common investing mistakes to avoid during bull markets

With the BJP government coming to power with a clear majority, many market experts believe that India is on the verge of a long term bull market. Therefore making money in a bull market is as easy as taking candy from a baby right? Time to give that concept a second thought… many times investors fail to get the returns they deserve because they fall prey to some common mistakes while investing in bull markets.

Here are 5 common equity investing mistakes to avoid during bull markets:

1. Trying to time the markets:

Investors generally face long odds in trying to time the ups and downs of the market. Most of them are not able to spot a bull market when it is taking off. When the market runs up significantly, they realize that they have missed the bus. Timing the market is difficult and requires financial expertise. Even the so called market experts may not get their timing right. We believe investments should be goal based, not timing based. Always set your investment goals and invest for the long term. Market timings do not matter if you have a long time horizon.

2. Ignoring asset allocation:

In bull markets hot stocks are always in news. Investors get enticed to buy these stocks and invest all their money in them without paying attention to the golden rule of investment i.e. asset allocation. Asset allocation is the process of diversifying investments among several asset classes i.e. equity, debt and gold to reduce investment risk. Its objective is to lower investment risk by reducing over-reliance on one asset class. But most investors however do not realize that portfolio return is directly attributable to asset allocation. Therefore, as an investor, you need to make sure that you properly allocate your hard earned money in different asset classes in order to fulfill your investment objective.

3. Following sentiments, not fundamentals:

In a bull market, investors tend to ignore the fundamentals and focus more on market sentiments. By fundamentals we mean the business of the company, its management and long term goals, the environment in which it operates and its investment process. Short-term market movements are driven by sentiments but long-term returns by fundamentals. Therefore, use fundamentals to make investment decisions and ignore the market noise.

4. Redeeming in market rallies – the other end of the spectrum:

In a bull market, stock markets rise sharply. An expected reaction to this might be to redeem all holdings in equities. Many investors overwhelmed and cash out during the market rally. But by cashing out during bull market, investors are compromising on their long term financial goals. Therefore, rather than taking any short term measures, investors should keep on holding to their investments till their financial goal is achieved.

5. Hanging on to underperforming funds:

While investors should have a long time horizon for their investments, they should make sure not to hang on to underperforming funds. Investors should monitor their investments on a regular basis and if a fund is underperforming over a longer time and has incurred loss then it’s better to exit from that fund. Even if this entails booking losses, investors should not hesitate in exiting underperforming funds instead waiting to earn profits out of it and ultimately incur more losses.

Conclusion

Investors should avoid these common mistakes while investing in a bull market. Equity investments are essentially long term investments. By selecting good process driven mutual funds, and remaining invested in them over a long period of time, investors can create wealth in the long term by leveraging benefits of compounding. However we strongly suggest you to consult with your financial advisor before proceeding with any investment decision.

UNION BUDGET - KEY TAKEAWAYS

1-CONSUMER Sector (FMCG)

   Higher than expected excise duty on

cigarettes

Defensive stocks continue to remain

expensive

2-METALS

   Upward revision in royalty rates – not a

surprise, was already due

Levy of import duty on coking coal, met

coke to marginally impact companies

Increase in export duty on Bauxite from

10% to 20%, positive for aluminium

manufacturers without captive bauxite

Intent to resolve iron ore mining issues

quickly – positive for steel producers

3-HEALTHCARE

Not much announced in the budget

The government is focusing on

healthcare, regulatory and research

infrastructure, rural penetration and

health for all

Positive for domestic growth over the

medium to long term

US opportunity remains very positive

along with revival in domestic

formulations

US patent cliff to benefit pharma

companies and domestic formulations

could also do well going forward 

4-AUTOS

   The increase in Sec 80CC benefit and

hike in IT slabs may lead to more

disposable income (marginally positive

for two wheelers and entry segment cars)

Excise duty benefit had already been

extended till Dec’14 before the budget

We remain positive on passenger vehicles

and medium and heavy commercial

vehicles (M&HCVs)

Resolution of mining issues should

increase demand for M&HCVs

Recovery in economic growth would lead

to a revival in demand (already visible in

June auto numbers) 

5-OIL & GAS

   We expect major policy announcements

for the sector to come in the next few

quarters

Decision awaited on gas pricing

framework and actual roadmap on

reducing oil subsidies further

Broad guidelines discussed in the budget

are positive, in our view – the need to

overhaul the fuel subsidy regime

including targeted subsidies, emphasis

on raising natural gas penetration,

harnessing unconventional gas

production and reviving production from

mature/shut E&P wells 

6-FERTILIZER

   New urea policy to be announced.

However, the timelines are not clear.

We expect the higher budgetary support

to trickle down to the small and marginal

farmers; improving their ability to afford

high yielding variety seeds, fertilizers,

crop protection chemicals and irrigation

equipments

7-FINANCIALS

PSU bank re-capitalization would be

positive. More clarity awaited. Banks will

need roughly Rs 2,40,000 crore

(US$40bn) by 2018 to meet Basel-III

requirements

Infra lending: Banks will be permitted to

raise long term funds for lending to the

infrastructure sector with minimum

regulatory pre-emption

FDI in insurance increased from 26% to

49%

Debt recovery tribunals (DRT): Six new

debt recovery tribunals to be set up. This

is a positive and will speed up recovery of

bad loans

Housing Loans: Increased interest

deduction on housing loans to Rs200,000

from Rs150,000. Positive: will reduce

interest burden on the consumer. To

illustrate this, for a Rs2mn loan the

effective interest cost (after tax savings)

would decline from 6% to 5.2% 

8-TELECOM

   10% customs duty on high end telecom

equipment is a negative for telcos

9-INFORMATION TECHNOLOGY

   No specific announcements in the

budget

The sector may continue to benefit from a

global recovery and increased

discretionary spend in the US/Europe

Stronger rupee could pose a risk to

margins in the medium term

10-CAP GOODS AND

INFRASTRUCTURE/

REAL ESTATE

   Focus on roads (8500 KM in FY 2015) and

allocation of Rs. 37,500 cr. (27000 cr. last

year)

Power: 10 year tax holiday extended till

March 2017

Defense: Capital outlay for defense

increased by 20% to Rs. 95,000 cr.

FDI in defense raised to 49% with Indian

management control

Development of airports in tier 1 and 2

cities via PPP route

Business Trusts to benefit the sector as

companies could monetize income

generating assets

Real Estate: REIT will be positive for the

construction/Real estate sector  

Margin trading: Five smart things to know

1) Margin trading refers to buying stocks using cash borrowed from the broker using the securities purchases as collateral.

2) For instance, for a position of Rs 100, a broker may offer Rs 50 as margin funding at a specific rate of interest. The remaining Rs 50 will have to come from the investor.

3) If the stock moves up to, say, Rs 102 in 30 days, you repay Rs 50 with interest and pocket the rest. If split equally, it would mean a 24% annual return for you and your broker on an investment of Rs 50 each.

4) At an interest rate lower than the return percentage, the gains are higher for the investor. For an appreciation lower than the rate of interest, the gains are higher for the broker.

5) Margin trading can be risky. If the stock falls to Rs 98, you still have to pay the broker his Rs 50 plus interest. You lose Rs 2 along with the interest paid to the broker.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) 

Best investment options under Section 80C to save tax

The Budget has raised the deduction limit. Here are the options in which you can invest to save tax:-

PPF
Rating: *****

The PPF is an all-time favourite investment option and the Budget has only made it more attractive by enhancing the annual investment limit to Rs 1.5 lakh. The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. The maximum investment of Rs1.5 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. The PPF is useful for risk-averse investors, self-employed professionals and those not covered by the EPF.

ELSS funds
Rating: *****

Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. But this should not be the most important reason for investing in this avenue. Being equity funds, these schemes can generate good returns for investors over the long term. The minimum investment in ELSS funds is very low. Though regular equity mutual funds have a minimum investment of Rs 5,000, you can put in as little as Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan or an insurance policy, there is no compulsion to continue investments in subsequent years. To make most of ELSS funds, stagger your investment over a period of time instead of putting a large sum at one go.

Ulips
​Rating: ****

The 2010 guidelines have made Ulips more customer-friendly. A new online Ulip launched by HDFC Life charges only 1.35 per cent for fund management. There is no other charge except for the risk cover provided by the policy. This makes the click2invest policy even cheaper than direct mutual funds. Keep in mind that a Ulip yields good results only if held for at least 10-12 years.

SCSS
Rating: ****

This assured return scheme is the best tax-saving avenue for senior citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility. The interest rate is 100 basis points above the 5-year government bond yield. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.

NPS
Rating: ****

Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. The scheme scores high on flexibility. The minimum investment of Rs 6,000 can be invested as a lump sum or in instalments of at least Rs 500. There is no limit. The investor also decides the allocation to equity, corporate bonds and gilts. Be ready for a lot of legwork before you can buy.

Bank FDs and NSCs
Rating: ***

Don't get misled by the high interest rates offered on the 5-year bank fixed deposits. Interest income is fully taxable so the post-tax yield may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of the tax-free PPF.

Life Insurance plans
Rating: **

Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy.

Pension plans
Rating: *

The charges of pension plans offered by life insurers are significantly higher than those of the NPS. The difference can snowball into a wide gap over the long term. The other problem is that annuity income is still not tax-free, which makes pension plans rather unattractive for retirees.