How NOT to invest in 2025

Summary

In this critique, a financial advisor breaks down key mistakes in an individual’s investment portfolio. The errors include speculative crypto investments based on hype, poor diversification with overlapping funds, and over-concentration in equities. The advisor stresses the importance of asset allocation, recommending a mix of equities, gold, and real estate. Additionally, the mentor points out the cost of choosing regular mutual funds over direct funds and the missed potential from opting for IDCW funds instead of growth options. By addressing these mistakes, the individual can build a more robust and profitable portfolio.

Takeaways

• 😀 Always research before investing, especially in volatile assets like crypto. Don't rely on social media or influencers like Elon Musk for investment decisions.
• 😀 Diversification is essential. Avoid investing in multiple funds that overlap in the same stocks, as it doesn't truly diversify your risk.
• 😀 A well-diversified portfolio should include a mix of large-cap, mid-cap, and small-cap stocks, as well as different asset classes like gold or real estate.
• 😀 Don’t put all your money in high-risk assets like equities and crypto. Include safer assets like gold to cushion your portfolio during market downturns.
• 😀 Regular mutual funds come with higher expense ratios compared to direct funds. Over time, this extra cost can significantly reduce your returns.
• 😀 Direct mutual fund plans are a better choice for long-term investors due to their lower expense ratios and better compounding potential.
• 😀 The Growth option in mutual funds is superior to the IDCW (Income Distribution and Capital Withdrawal) option for investors seeking long-term growth through compounding.
• 😀 Reinvesting dividends through the Growth option can lead to higher returns over time, as it harnesses the power of compounding.
• 😀 Understanding how different asset classes react in various market conditions is crucial. For example, gold tends to perform better during equity market declines.
• 😀 Avoid making impulsive investment decisions based on market trends or temporary hype. Always base your choices on sound financial analysis and a clear understanding of the investment.

Q & A

Why is investing in crypto considered a mistake in this scenario?

Investing in crypto, like Dogecoin, based solely on hype (such as tweets from celebrities like Elon Musk) without proper research is risky. Cryptocurrencies can be highly volatile, and without understanding the underlying technology or market, it’s easy to make poor investment decisions.

What does the speaker mean by saying the individual didn't properly diversify their portfolio?

The individual invested in multiple mutual funds, but all of these funds invested in the same set of stocks (e.g., HDFC Bank, Reliance Industries). This created overlap rather than true diversification, meaning the portfolio wasn’t as diversified as it appeared.

What is the problem with putting all of one’s money into equity and crypto?

When an individual invests solely in equity and crypto, their portfolio is exposed to market crashes, as seen in the COVID-19 downturn. Including other assets like gold or real estate provides stability, as these assets often perform differently in various market conditions.

How can gold help diversify an investment portfolio?

Gold often behaves differently from equities during market downturns. For example, when the stock market falls by 34% (like during COVID-19), gold might remain stable or even increase in value, thereby reducing the overall risk of the portfolio.

Why is it important to avoid investing in regular mutual funds over direct funds?

Direct mutual funds have a lower expense ratio compared to regular mutual funds, which means more of your money stays invested and compounds over time. Even a 1% difference in expense ratio can lead to significant returns over the long term.

What is the impact of choosing the IDCW (Income Distribution and Capital Withdrawal) option in mutual funds?

Choosing the IDCW option can reduce the compounding effect on your investments, as dividends are paid out rather than reinvested. In contrast, the growth option allows the dividends to be reinvested, leading to better long-term compounding and higher returns.

What is the main difference between the IDCW and Growth options in mutual funds?

The key difference is how dividends are handled. In the IDCW option, dividends are paid out to the investor, while in the Growth option, dividends are reinvested into the fund, allowing for better compounding and potentially higher returns over time.

Why is it recommended to invest in the growth option instead of the dividend option for younger investors?

Younger investors benefit from the compounding effect of reinvesting dividends through the growth option. Since they have time on their side, they can accumulate greater wealth over time compared to receiving payouts through the dividend option.

What would be the difference in returns if one invested in direct funds versus regular funds for 15 years?

Investing in direct funds can result in a higher return because of the lower expense ratio. Over 15 years, the difference could be substantial—up to 8 lakhs more with direct funds due to the reduced fees.

What are the consequences of poor diversification and high concentration in a few stocks?

Poor diversification can increase the risk of large losses, as your portfolio is more exposed to the performance of a few stocks. If those stocks underperform or face a market downturn, your portfolio will likely suffer significant losses.