Five common investment mistakes you should avoid
If you still believe that govt schemes and guaranteed returns are what you should look for in an investment, you need to read on. Here are some common investment mistakes to avoid.
With consumer products, we’ve learnt not to rely only on sales pitches. We know that a company is simply trying to make a good first impression and that further analysis is necessary before a purchase is made. With financial products, however, a disproportionate number of us fail to do any substantial research into what we’re buying. Even though the amount invested into an insurance scheme or a mutual fund could, over the years, be more than the cost of your car! Instead, we rely on lines from an agent’s sales pitch or a slogan from a brochure. While these may be true, they can mislead you into buying exactly what you don’t need. Here are five examples:
“You can always trust government schemes”:
While investing, it is best to analyse products first, and only later the company that is selling it to you. Often, however, investors will tell you that you should trust only in public sector schemes, under the assumption that the government will ensure that your money does not disappear. This often misleads investors into buying costly products, just because they are sold by a public company. For example, LIC enjoys a high level of trust among lay investors. While it is partially deserving of this status, given that it has the highest claim acceptance ratio in the insurance business, the bulk of LIC’s product portfolio is made up of costly investment schemes that offer paltry insurance cover. The list of products includes pension plans, unit-linked insurance plans and endowment plans.
“Just buy it on EMI”:
The EMI option may be expanded to ‘Easy Monthly Instalments’ in advertisements, but it actually refers to ‘Equated Monthly Instalments’. It also involves payment of an administrative fee as well as an interest rate of up to 15% with white goods, depending on the length of the repayment period. Now, we’re not saying that you should never use this option – just that it is not to be used frivolously. The main reason is that it could damage your credit score, which is accessible to all banks and credit card companies. If they notice that you’re too eager to take a loan on household appliances, they may assume that you’re unworthy of a larger loan for a car or a home, or for an increase in your credit card limit.
“Returns are guaranteed”:
There’s no such thing as a free lunch, right? So why would you expect a risk-heavy product such as a ULIP or a pension plan to guarantee you a return? What actually happens when an insurer or fund house promises you a minimum return is that you are charged a fee, usually 0.5% of your investment. Moreover, the scheme you’re investing in is likely to be too conservative with your money, for fear that it will fall below the guaranteed return rate.
“With this investment, insurance is free”:
Insurance is not expensive. If you’re, say, 30 years old, you could buy cover of Rs1 crore for Rs8,413 from Aegon Religare for a term of 25 years. So when an investment plan has an in-built insurance component that’s just 10 times what you pay as annual premium, you should know that its cost is miniscule. To put this in perspective, you would need to pay a premium of Rs10 lakh to give you insurance cover of Rs1 crore with most ULIPs or endowment plans. If you think you are insured, but haven’t bought a pure term insurance plan (with zero investment component), you may be underinsured.
“Just put your money in ELSS”:
The equity-linked savings scheme is a good option under Section 80C, which allows you to save tax and gain equity exposure. However, a dangerous way to do it is through a lump sum investment. Yet, because many of us only end up making tax-saving investments right before the end of the financial year, this is exactly how they end up being made. The much better way to do it would be through a Systematic Investment Plan, which would spread your investment into smaller amounts that have a better chance fighting market volatility.