The biggest financial mistake is doing nothing to save, invest, and diversify, and here’s a solution to rectify it.

Doing nothing is a double-edged sword. It has its benefits when done at the right time and its consequences when done at the wrong time. Doing nothing can be rewarding after you start a long-term Systematic Investment Plan (SIP) in equity-linked mutual fund schemes that align with your financial goals. For instance, those who invested in the Nifty 50 Index in 2014 and did nothing are sitting on good returns. At the same time, those who kept procrastinating and did nothing in terms of investments have missed the opportunity to compound their money.

The biggest financial mistake of doing nothing

Learning from the mistakes of others can help you avoid that mistake and start right. Here are the four most common financial mistakes people make that have cost them a significant amount in missed opportunities.

1. Not saving from first salary onwards

   When you start earning, investment may be the last thing on your mind. Many have a student loan. There is an urge to spend when one finally has the money they can call their own. Living paycheck to paycheck is not sustainable as you might be in a fix if you lose your job, get a lower salary, or a sudden expense comes up. It could force you to take debt.
   
   Doing nothing about saving from Day 1 of your earnings is the biggest financial mistake. And this mistake can cost you a significant amount if you add up the returns from compounding.
   
   One can avoid this mistake by starting savings, no matter how small the amount, from Day 1 of your earnings. Taking a SIP route to invest in mutual funds allows you to begin with just Rs 100 per month.

2. Not having a financial plan

   The second biggest financial mistake one makes is investing without planning. Even if finance is not your area of interest, you should seek financial advice from a professional and chart out a financial plan. The financial plan helps make realistic financial goals, invest in the right instrument to achieve those goals, and have a risk management strategy if your investments underperform.
   
   Doing nothing about planning your finances could leave your portfolio vulnerable to taxes and market risks.
   
   Take time to prepare a financial plan and invest in instruments that meet your financial objective. The plan will help you prioritize your goals, optimize your investments, and mitigate risks and taxes, enabling you to achieve your goals.

3. Not buying the dip

   Another big mistake investors make is not buying in the dip due to fear of market losses. Even though historical data has shown that the market index, Nifty 50 and BSE Sensex, have rebounded after a dip, many make the mistake of doing nothing in the dip.
   
   Instead of doing nothing, one can use the bear market as an opportunity to buy the dip.
   
   A long-term SIP can help you buy in the dip and rally both. Investing in the dip can help you buy more units of mutual funds and reduce your average cost per unit. Doing nothing and continuing with the SIP in a market downturn is the right way forward.

4. Not diversifying

   Many refrain from investing in the stock market because they make the worst financial mistake of doing nothing about diversifying their investments. While one may start investing early and continue SIP through the market peaks and troughs, investing in a single mutual fund scheme or only one asset class can increase the risk. This is where diversification helps.

Importance of portfolio diversification

• Investment diversification helps you mitigate risk by investing in uncorrelated asset classes. While gold hedges against inflation, debt preserves wealth from short-term market volatility.

• Diversification also helps you optimize returns as weakness in one sector can be offset by strength in another.

• Diversification also helps earn returns in different economic scenarios. Large-cap stocks tend to outperform in a weak economy while mid and small-cap stocks can outperform in a strong economy.

Diversification has multiple levels.

• The first level of diversification is investing across sectors. A Large -cap equity scheme invests in multiple large-cap stocks across sectors. Similarly, a Small-cap Equity scheme invests in multiple small cap stocks across sectors.

• The second level of diversification is investing across market caps, large, mid, and small-cap stocks. A Flexi cap fund dynamically invests across all three market caps depending on market conditions.

• The third level of diversification is across asset classes like equity, debt, and commodities. A multi-asset allocation fund invests across asset classes to optimize investments and manage risks.

• Beyond this, there is diversification across investing strategies, international stocks, and more.

The first three levels of diversification are necessary to make your core portfolio resilient to market mood swings and generate wealth in the long term.

A well-diversified portfolio can help you achieve long-term financial goals like retirement, house, and child education.

Diversify your investments with Aditya Birla Sun Life Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.