Common Financial mistakes investors make and how to avoid them
Investing is often fraught with pitfalls—many of which stem from psychological biases and over reliance on past data. Here are some critical insights to help investors avoid these common traps.
Not having adequate health and life insurance
Many people equate investing in life insurance products like endowment or money back products as ‘investing’. It is essential that you keep insurance and investing separate. Even before you begin your investment journey, ascertain how much health and life insurance is adequate for your family. According to media reports, Healthcare cost is rising in India, growing at almost 14%annually. Not having adequate insurance can dent your savings in a big way. Getting a term plan at an early age is an ideal option to get higher coverage and protect your loved ones.
Not having an emergency fund
Accident, job loss, or any other such unexpected event can burn a hole in your pocket. Not having an emergency fund will lead you to withdraw from your funds or run helter-skelter to borrow from friends or family. Financial planners recommend having 6 months to 1 year buffer saved in easily accessible savings account or Liquid Mutual Funds/Money Market Funds, which can be used to plan for life unexpected surprises.
Once we have the basics in place, let’s move on the common mistakes people make while investing.
Adopt goal-based investing
Any investment journey should ideally start from knowing the purpose of our lives – our passion and goals. Investing without having a goal in mind is like travelling without knowing your destination. Without having clearly articulated your goals, (short, medium, and long term) you will be left wandering into different investment avenues – sacrificing your long-term goals for short term gratification. A simple hack is to have a separate investment account for each goal which gives you focus and structure your cash flows in such a way that you won’t dip into your savings which are meant for long term goals. For instance, if you are investing for building your retirement corpus, it makes sense to invest in products which are specifically designed or labelled for them or have lock-in which in a way brings discipline of staying invested during volatile markets and benefit from compounding, which is an essential ingredient for long term wealth creation.
Not verifying information before investing
The digital revolution has democratised investing. Overload of information on TV and social media and the desire to make quick bucks has led many investors fall prey to fly-by-night finfluencers. Of late, there have been many instances of imposters pretending to be experts duping people into investing in stocks or derivatives which promise astronomical returns. Even highly educated professionals have succumbed to this trap. Thus, it is always advisable to verify any information coming your way. It’s always best to take the guidance of a qualified advisor who can guide you to invest safely.
Relying on Past Performance
Many investors have this tendency to focus solely on recent returns—such as one- or two-year performance—and assume those gains or losses will continue. Why that’s risky? The hot theme or sector which has done well in the past may or may not continue its stellar performance going ahead. No one theme or sector does well ever year. Markets are cyclical; short-term trends don’t guarantee future results. Evaluate returns over a long horizon—ideally 5 years or more. Examine risk-adjusted returns, such as rolling returns and volatility metrics, rather than just absolute returns. Compare funds against broad indices, not just peer schemes.
Not Diversifying Across Styles
The mistake: Holding multiple funds that invest in similar companies or market segments is false diversification—and often too late, based on recent performance trends. Why that’s a problem? Funds may overlap in holdings and strategy, increasing concentration risk. Style cycles shift. A growth fund may surge one year, value another year. Identify fund managers’ core investment styles (growth, value, momentum, quality). Build a portfolio that blends different styles—this balances exposure and smooths returns over full market cycles.
Timing the Market
The mistake: Attempting to enter or exit markets based on short-term swings—like dips or spikes—often leads to missed opportunities. We ran a study internally to see the long-term impact of missing the best days in the market by analysing returns of Nifty 50 TRI of the last 24 years (Sep2001-Jan 2025). The data shows that if you miss the best 50 days during this period, you compound your money at less than 1% a year! On the other hand, if you stayed invested, you end up earning a CAGR of 15.61% during the same period. For example, Rs 10,000 invested in2001 grows to Rs 3.25 lakh in 24 years if you stayed invested. On the contrary, if you missed the best 50 days, your 10K investment grows to just Rs 11,550 in 24 years! ( Source: MFI ICRA, Varsity, PGIM India Internal) This shows us that trying to predict market tops and bottoms could be a tall order. Many investors who sell during a crash struggle to re-enter at the right time and miss out on the market’s best recovery days.
Overdiversification
Many entrepreneurs who have made it big have done so by investing in a single idea or their company. Concentration can either make you a winner or a loser. However, average investors run the risk of losing their savings if they were to bet their entire savings on a single stock or idea. Thus, diversification becomes essential. But in doing so it’s best not to overdiversify.
An overly broad portfolio within equity—not across assets—can incur unnecessary costs and cause overlap. Why it matters? Asset-class diversification (equity, debt, gold, cash, commodities, international funds, real estate/REITs) is essential. But excessive piling on equity funds, especially within the same category, increases risk, duplication, and management fees. Diversify across market cap – large, mid and small cap. Within equity, choose funds with distinct strategies and managers to minimize overlap and maximize style diversification.
Postponing saving for retirement
Treating all financial goals equally—or postponing retirement planning—undermines long-term security. Why it’s crucial? All other goals (home, child education, vacation, etc) can be financed with loans—except retirement. Thus, retirement corpus must come from your own investments. Delaying saving for this important goal means you must invest more money to achieve the same goal. Let me explain with a simple example.
Imagine two friends Rishi and Ronak both aged 30 years who plan to retire at 60. Rishi starts investing 5,000 per month through SIP in a diversified equity fund yielding 12% CAGR for 30years duration. Ronak also invests the same amount and gets the same 12% return, but he starts his investing journey at the age of 40 years. Here are the results.
Rishi has accumulated Rs.1.76 crore in 30 years while Ronak has generated close to Rs. 50 lakhin 20 years. A difference of Rs.1.26 crore – the cost of delay for Ronak. Even though you areinvesting a smaller amount, starting early is the key.
To avoid common errors:
Invest with goals and stay for the long term.
Focus on 5+ year, risk-adjusted returns.
Mix fund styles; avoid overlap.
Diversify across assets, not just funds within a class.
Rank your goals, with retirement at the top.
Start disciplined investing early to leverage compounding over decades.
A financial advisor can offer valuable perspective, much like a second opinion with doctors.
Investing wisely isn’t about finding a perfect fund—it’s about disciplined strategy, awareness of biases, and structured planning.
(The article is written by Mr. Ajit Menon, Senior Advisor, PGIM India Asset Management)