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5 things investors should be wary of

December 09, 2004 11:06 IST

With the equity markets spiraling northwards, there is a lot of advice doing the rounds on what investors should be doing.

Amidst all the excitement, there is also a dire need for investors to exercise caution in certain aspects related to their investments; we present a checklist for the same.

1. Deviating from your risk-return profile
Each investor has a risk-return profile that remains unchanged, irrespective of market conditions. If as an investor, hybrid instruments like balanced funds and monthly income plans fit into your profile, then stick to them; there is no justification for getting invested in diversified equity funds.

Rising equity markets should not be an excuse for taking on higher risk.

2. Advisors with a hidden agenda
If your mutual fund advisor advises you 'not to book any profits' or to get invested in avenues contrary to your risk-appetite, then he may not have your best interests at heart.

Steer clear of such advisors and their advice. There is a fair chance that financial considerations are overriding his advice. If you have raked in reasonable returns or achieved your objectives, booking a part of your profits would be a prudent move.

3. Succumbing to greed
The temptation to rake in quick profits can be a strong one, especially in times like the present one when markets are rising incessantly.

The month of November 2004 saw top performing diversified equity funds clock stupendous returns in the range of 11% to 18%; such performances should be treated as an aberration at best.

How markets will behave going forward is anyone's guess and investors must make their investments only with a long-term view.

4. Making lump-sum investments
Investors who wish to make investments at this stage can do so, but strictly using the systematic investment plan route.

Investments made via the SIP route will go a long way in helping investors mitigate the risks associated with investing at unreasonably high levels; something lump-sum investments are often prone to.

5. Retaining deadwood in your portfolio
There could be a few investments in your portfolio that might seem inappropriate in hindsight; also there is a fair chance that these investments are attractively placed at present due to the rising markets.

Utilise the opportunity to sell off such deadwood at a profit. Don't be complacent while dealing with such investments simply because they look profitable at present.

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