Evolution has made us change a lot of habits but some of us still get stuck to the age old methods which can prove to be an expensive ploy if not changed. This happens specially in case of investments. Lack of awareness about new investments options, volatile markets, old age book knowledge contributes a lot in not letting us evolve in our investment practices. In a current scenario where inflation is high, taxes are growing and the interest rates are falling and so the job markets are uncertain, one needs to look into the way their hard earned savings have been deployed.
Some of these outdated investing rules are mentioned below which we need to do away with.
1) Age based equity allocation (100 minus your age)
This rule became popular in the 1970s and ‘80s with the emergence of retirement plans, as individuals tried to come up with a handle on asset allocation without necessarily trying to conquer the subject matter.
The problem here is that only thing this does not involve is individual perspective on risk and their needs. A young professional may not have high risk appetite to invest in a portfolio which is equity heavy. There may be a case that they have some short term needs, high mortgages to service where this kind of allocation may not be the right thing to do.
2) Fixed Deposits / Recurring deposits as an effective tool
We are still stuck to trusting the fixed income saving schemes like Fixed Deposits, Recurring Deposits, to fulfill our future financial needs. The sole reason for such behavior is not knowing what markets have to offer us. Most of these schemes either lacks liquidity, or do not have ability to beat inflation on a longer run. Let’s take a fixed deposit as an example. Currently the banks are offering 7.5% as an interest rate which comes to below 5.5% post taxation which is just no enough. Moreover the premature withdrawal can attract penalty of 1% of interest.
3) Fixed Income savings instruments
It is a conceptual mistake most of us make when we count the fixed income savings instruments as an investment option. These includes FD, RD, NSC, PPF and even EPF.
One needs to understand a difference between a savings instrument and an investment tool. Any avenue where the returns and tenure are pre-defined, it is just a savings instrument and not an investment option. An investment includes uncertainty which actually results in superior returns in longer run.
In the current interest rate scenario, we have seen their returns going down which again affects the overall gain.
4) Mutual Funds are Risky in Nature
To answer this question in one simple sentence “Yes, they are risky”. But what option do an investor has if he wants 12%-15% returns in longer run. The traditional savings instrument fails to give such returns and moreover their rates are being slashed. Some of these instruments are not very liquid or is fixed for a tenure of 6-7 years. It’s time that one needs to take some risk and not miss out on an opportunity to get some return.
5) Gold/Real Estate – Essential asset for every Indian
In the current volatile market situation, no investment option is a safe haven. Real estate and gold were named as one but things have changed. You cannot buy a property for 2 years and sell it off in a day. It is not a tradable object in a stock market that we choose the price and sell it. Holding a real estate also incurs cost which needs to be included in the net gain /losses and also the transaction of buying and selling involves outflow of cash which we tend to ignore at times. Maintenance of a property also affects the income derived out of the rentals from it.
6) Insurance – ULIPS & Endowment Plans
People often believe that investing in insurance policies benefit tax saving as well as provide risk coverage and end up paying high premium. Investing in insurance cum investment plan have become obsolete and sometimes fails to even match the inflation. Going by the basics, one should not mix insurance and investments at all. You will end up with a high cost, low returns and low coverage product which will turn out to be a financial mistake eventually.
7) Investing is Only For Rich
Investing can be a great way to make money on your money. The sooner you educate yourself and start investing, the more returns you may earn over time. No longer do you need a ton of spare money to invest, you can start an investment with Rs. 500 in the Mutual Funds.
8) Anyone Can Advise me for the Investments
Just like you need doctors, architects, Chartered accountants etc. for their specific skill set. There are professional who has right skill set to advise you the right investment avenues based on individual needs, risk appetite etc. It involves a 360 degree process of individual behavioral aspects on market movements, assessment of goals and individual net worth. One should consult a financial planner/investment advisor for right advice on the investment.
ArthaYantra – World’s only full service Robo Advisor ensures that the customer gets a professional and calculated advice from Certified Financial Planners which is unbiased, fact based and ensures right practices.