“Learn from the mistakes of others; you can’t live long enough to make them all yourself.” Have you heard this Chanakya’s quote? Although applicable everywhere, it has a far deeper reach in investing.
Applying this generic quote alone can save you from financial disasters because the repercussions of one mistake can overshadow hundreds of good things you do before investing, like collecting the data, hours of research, analysis, and whatnot.
This can be even more severe if you invest in an asset class like US ETF with thousands of options. So, in this article, we will see some common mistakes while investing in US ETFs that you must avoid.
1. Investing in something without understanding what it is
Often, investors jump on a particular ETF because of the FOMO (Fear of missing out) without understanding the nature and risks of the ETF.
This can lead to disastrous impacts on your financial health if the decision does not go your way because you get exposed to many risks, and you are not aware of them.
So, to avoid such a situation, you should first understand the ETF. Know its underlying index, whether it is thematic or not, large-cap or small-cap, the AUM, expense ratio, etc. You will get all this information in the scheme document of the ETF.
2. Going with the trend
This is a very common mistake that investors make. You may get into trouble by investing in an ETF because a particular sector or theme is trending.
Thematic investing is good but comes with its own set of risks. If you think a particular sector or industry will flourish, then only you should invest in such ETFs, not because the prices are rising.
3. Ignoring Diversification
Diversification is a must to avoid company-specific risks. These risks are avoided partially when you invest in ETFs. But these types of risks remain if you invest only in one ETF.
So, it would be best if you diversify your investments across some ETFs of different categories, so the overall risk is reduced significantly.
4. Not Considering the expense ratio
Expense ratios are very important when it comes to ETFs. Since ETFs are often passively managed, the expense ratios are very low compared to actively managed funds.
So, you need to consider those funds with the lowest expense ratios because even a tiny difference can have a considerable impact in the long term.
5. Investing in ETFs with very low AUM
Sometimes investors invest in an ETF with a low AUM just because it has performed well. Low AUM ETFs are considered risky compared to the ones with high AUMs.
ETFs that have considerable AUM are better managed. So, choose those ETFs which have considerable AUM.
6. Trying to time the market
The stock market behaves like a drunken man. No one can predict in which direction it will move in the short term. If you wait for markets to come down and do not invest, it may happen that markets will not come down, and you may lose the opportunity.
It is better to remain invested and keep investing at regular intervals so that your investments’ average cost decreases significantly.
7. Exiting the ETF without any reason
Investors need to understand that investing requires patience. If you remain invested long-term, you will witness the magic of compounding. But many times, investors exit the ETFs without any reason.
So, only exit with a valid reason. You should exit the ETF only if you need the money or there is an issue with the fund, sector, or economy.
8. Ignoring taxes
Taxes can impact your post-tax returns drastically. Many investors earn hardly anything post-tax because of ignoring this factor. You should consider this factor and plan your finances accordingly.
9. Not knowing the forex rates
This is a common mistake with Indian investors investing in US markets. Sometimes investors ignore the forex rates in a hurry to invest in US ETFs.
The exchange rate is crucial when transferring funds from India to your US trading account. Moreover, a foreign exchange conversion fee will be charged by your bank.
So, using a platform that has partnered with banks and provides better exchange rates and a lower markup fee is recommended.
10. Violating the FEMA Regulations
As an Indian investor, you are required to adhere to the FEMA requirements when you enter any foreign exchange transaction.
Although it has become straightforward to remit outside India due to LRS, violating these regulations can attract severe penalties and regulatory consequences.
