Retail investors are non-professional individual investors who invest on their own or through stockbroking firms. Recently, there has been an increase in the participation of retail investors in the Indian financial markets. In FY21, the number of retail investors increased by 14.2 million. As a result, Indian stock markets have a dominant presence of such investors.

Retail investors should be aware of a few things when it comes to investing. Since most of them lack the experience and knowledge required to invest, they should adopt due diligence and test the waters before committing. The following investment advice can help you, as a retail investor, to make prudent decisions and get the most out of your investment.

Have a financial goal

Investing without a financial objective is like sailing on a ship without radar. Financial goals define the plan for your investment and help you identify the investment avenues you should choose to achieve them. You should invest according to your goals and the amount needed to achieve them.

Divide your goals into three categories:

Short term

The time frame for short-term goals ranges from six months to a year. These goals may include vacations or building an emergency corpus. To achieve short-term goals, you may consider investing in liquid funds or fixed bank deposits.

Middle term

The medium-term objectives should be achieved in approximately three to five years. These goals may include accumulating funds for a down payment on a home. For medium-term goals, you can invest in aggressive hybrid funds.

Long term

Long-term goals are 15 to 20 years or more. These goals involve the higher education of children, retirement, etc. For long-term goals, you can invest in pure equity funds, as they have the potential to generate returns above inflation over the long term.

start small

As a retail investor, it is advisable to start small and scale your investments. This is especially true if you are investing in stocks for the first time. Stocks are a volatile asset class. If you initially lose a large amount of money, it leads to a bitter investment experience.

If you’re new to investing in stocks through mutual funds, it’s best to start with Systematic Investment Plans (SIPs). SIPs help you stay invested through market cycles, accumulate more units when markets are down, and build a disciplined savings habit. As you stay invested for a long time, this reduces the volatility quantum.

Understand the different financial products

Before investing, you need to analyze different financial products, understand their operating mechanism and the associated risks. By doing so, you can assess whether the product is in line with your risk tolerance and goals or not.

For example, if you are someone who likes assured returns and is put off by the slightest volatility, it does not make sense to invest in market-related products such as stocks and mutual funds.

However, if you have a high risk tolerance and can handle the volatility, you should probably bet on the products mentioned above. Understand that each financial instrument is different and serves a specific purpose. It is crucial for you to have a 360 degree view to make a prudent choice.

Diversify your investments

Diversification is one of the fundamental principles of investing. You need to diversify optimally to give your portfolio the balance it so badly needs. When you diversify, you can take advantage of different financial instruments and asset classes. Indeed, market movements affect different asset classes differently.

On the other hand, if you only invest in one asset class or financial product, your portfolio becomes concentrated. Your portfolio will take a serious hit if the asset class fails to live up to its expectations. Therefore, the goal should be to spread your investments across multiple asset classes to mitigate risk and preserve gains.

It is equally essential not to over-diversify, as over-diversification dilutes returns and makes a portfolio bloated.

Don’t follow the herd mentality

Herd mentality is quite common. Affected people blindly follow the investments made by others without thinking twice. The results can be disastrous. Note that investments do not follow a one-size-fits-all approach. Each individual is different in terms of financial goals, risk appetite and cash flow.

Therefore, what may work for others may not work for you. If you find that everyone is chasing a particular stock or fund, you don’t need to do the same. Analyze your financial situation and goals before taking a call. The logic associated with discipline can help you keep the herd mentality at bay.

Don’t let emotions cloud your judgment

There is no room for emotions in investments. Investing unemotionally can increase your long-term wealth and weed out the laggards in your portfolio. Most retail investors are swayed by emotions when making investments, only to regret later. When markets are in the middle of a bull run, greed takes over and most end up investing at high valuations.

On the other hand, in a bearish phase, several investors press the panic button and take the exit route. Both movements are undesirable. When you allow your emotions to take control, logic takes a back seat. You fail to see the big picture when you tend to invest emotionally.

Conclusion

Avoiding these mistakes can help you take control of your investments. Plus, they help you overcome difficult situations with ease and ensure that you are on the path to financial freedom.