Few would argue if you told them that investors today are more aware than investors in prior generations. This is largely due to the plethora of investment education sites, newspaper articles, investor meets and so on conducted by well meaning (or not so well meaning) investment houses.
But one thing that stubbornly remains is that investors are still laboring under misapprehensions or myths about what makes good investing. PersonalFN is here to bust these myths wide open.
Let’s get started.
Myth 01: I’ve made my Tax Saving Investments, so I’ve done enough.
Fact 01: Tax Planning is only a small, albeit integral, part of holistic financial planning.
The best investors i.e. the ones who make the most return and take the least amount of commensurate risk, are the ones who follow an overall financial plan for their life goals. Tax saving is a small part of this overall Plan, but tax saving investments are made with the same foresight as all other investments.
The tax season for last year is done, and as usual we saw the rush of investors making their last minute tax saving investments. But one thing that you might not know is that the slew of tax investments happens not only in March, but in April too.
In March every year, we see clients who are making last minute tax saving investments into either the PPF, or ELSS mutual funds, or 5 year Bank FDs and so on.
Then in April, we see all those investors who are much more relaxed, making tax saving investments for the new financial year in line with their overall financial plans.
The difference in these 2 types of investors is stark. And you are better off in the April lot.
(To make your tax saving investments for the new year now, read these articles:
Tax Saving Tips Under Section 80C
Easy Tax Saving Tips Beyond Section 80C)
Myth 02: Investing Should Be Exciting! I should Diversify As Much As Possible!
Fact 02: Investing should be boring, and over-diversifying can actually hurt you. So this myth fails on both counts.
People who chase excitement are not steady investors. At PersonalFN we have seen investors insist on the next hot investment avenue, typically in the form of a new thematic fund or the latest structured product, which is nothing but a sequence of bets on where the Nifty is going to end up. These investors tend to lose money, or make no money (in the case of a structured product, your capital is usually protected, but most often there will be no actual gains to be had). They cram their portfolios with every new fangled product that hits the market and one and two years later wonder why their returns are only in the range of 2-3%, or possibly negative. So the opportunity cost is significant.
Keep in mind that over-diversification can actually hurt you.
There are 2 levels of diversification. One is across asset classes, the other is within the asset class. Think of it as inter-asset class and intra-asset class.
You do need a level of diversification across equity, debt and gold. Equity will beat inflation and help you take part in corporate growth by being a shareholder of a well researched, successful company over the long term. Debt will protect your capital and give you slower, steadier returns. Gold will hedge against inflation. But this doesn’t mean you should run out and invest in every type of instrument that hits the market. Stick with well chosen equity mutual funds for diversification across companies, sensible fixed income products like FMPs, FDs and liquid funds for your cash needs, and gold by way of ETFs.
(Also read our article on why Holding Too Many Funds Can Be A Mistake)
Myth 03: Plan for my retirement? I’ve got plenty of time for that!
Fact 03: You don’t.
Retirement could be around the corner, or it could be in thirty years, depending on how old you are and how long you choose / need to work. But let’s open our eyes. Life today is much, much more expensive than it was for our parents and grandparents. Inflation isn’t letting up and once prices go up the way they have, it’s difficult for them to come back down to pre inflation levels and stay there. A rise in standard goods and services prices is never temporary, even if it may seem so.
Lets suppose you’re 35 years old, married, two kids. Leaving all your other life goals aside (pay off home loan, buy new car every 5 years, put kids through school, college, university, pay for kids weddings, take family vacations, keep updated on gadgets and technology… and so on and so forth) and looking only at your retirement, let’s see what it’s going to take.
Suppose in your post retirement years you want to be able to spend Rs. 75,000 on household expenses and Rs. 25,000 per month on discretionary expenses, medical care, and any other expense you would like to consider. That’s Rs. 75,000 per month plus Rs. 3,00,000 per year.
You are currently 35 years old and would like to retire at 60.
Taking inflation at 10% per annum on household and discretionary expenses, a life expectancy of 85 years, post retirement inflation at 8% and post retirement return at 8% as well (to keep things simple) you’re going to need Rs. 32.50 crores to retire in peace and maintain your standard of living.
So, you really need to get started right away. The good thing is with a small change in the numbers, you have a big change in the retirement corpus you need to build. Cut the monthly expense from Rs. 75,000 to Rs. 50,000 and maintain additional discretionary expenses at Rs. 3 lakhs a year, and the corpus you need to build comes down to Rs. 24.38 crores.
Myth 04: I can do this on my own, I don’t need a Financial Planner, they’re too expensive.
Fact 04: Getting bad financial advice or no advice at all, will be much costlier than the fee you would pay your Planner.
A Planner is important because you need someone who’s going to give you unbiased advice. This is why it’s not just any Planner that you need, you need the right kind of Planner. There are questions you should ask any Planners that you are evaluating. For more information on this read our article titled Where Should You Seek Professional Advice?. and one article you must read, print and look at once a week is The Shocking Reality About Financial Advisors.
While investors are smarter today, they also have more to deal with. More information, more products, more options and therefore a surfeit of choice, more demands on their time and money, more demands from themselves. You need someone who can sit down with you and create an over-arching financial plan that will help you simplify your financial life, and gain complete control over it. For an unbiased expert financial planner, call PersonalFN.
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