I am a 35-year-old working in Bangalore. I started working at 21 as soon as I had graduated from journalism school. Shortly afterwards, I made my first investment. Looking back at the last 14 years, I can see all the mistakes I’ve committed in my financial life. Largely, these were committed due a near-total lack of understanding of financial planning and investment options. However, I was also misled. Like it happens so often, I was mis-sold products by people who could have advised me better but chose to focus on their bottom line. Looking back, I can see how I could have streamlined my finances instead of creating the right-royal mess I made in the name of tax saving. If I could speak to my 22-year-old self today, here’s what I would talk about.
Insurance Mistake #1. I Bought A ULIP.
Worse, I dumped it shortly after the 2008 financial crisis. The ULIP was my first investment of any kind. This was in December 2005. The equity market was on a roll. I had no understanding of what I was getting into. I couldn’t tell my 80C from my 80D. However, I went with my family’s advice to buy this opaquely-designed product where a large chunk of my premiums would go into commissions and expenses of various kinds. As the global economy went into recession, my investment tanked. I made the three mandatory payments and exited the policy. ULIPs by then had a poor reputation. But had I stayed on for a couple of more years, I could have cut my losses as the markets recovered.
Insurance Mistake #2. I Bought An Endowment Plan From A Friend.
As a rookie investor, I was spooked by the crash. Now, I wanted safety first. So I thought it’d be wise to invest for assured returns. I was sold an endowment plan by a friend working with a bank. The plan calls itself “savings assurance”. It’s a 10-year plan with an annual premium of Rs. 40,000. I started this investment in February 2010. After nine years, I’ve invested Rs. 360,000 in this policy. In January 2019, I decided to check the policy’s surrender value. The company informed me that it is just Rs. 360,854. My total input towards this policy including taxes is close to Rs. 3,65,000. Effectively, the policy has provided negative returns in 9 years. An ordinary savings account returns 4%. In this period, inflation has been around 6.5%. Therefore, every year I’ve had this policy, I’ve lost money at a rate of over 6.5% per annum. It was neither savings nor assurance.
Insurance Mistake #3. I Bought A Cashback Policy.
Fast-forward two years. I still haven’t learnt my lesson. I bought my third insurance policy – this time a cashback policy. I’m married at this point. I have heard of term plans. However, I was still unconvinced of insurance policies that pay nothing if you survive the policy term. I bought the cashback policy because – you guessed it – I needed to save tax. At this point, my life cover was woefully inadequate, as was the rate of return from these policies. What I should have done was…
I Should Have Bought ELSS
In my 20s, after my initial problems with ULIPs, I was shy of equity investments. But it would have been in my best long-term interests. Let’s say that instead of Insurance Mistake #2, I had invested in the ELSS scheme from the same group. It would have required me to invest Rs. 3,400 per month through an SIP instead of the lump sum of Rs. 40,000. From February 15, 2010 to January 15, 2019, my 108 monthly contributions totalling Rs. 367,200 would have created a corpus of Rs. 610,597 at a compounded annual rate of return of 11.13% — far more than PPF (7.6% to 8.8%) in the same period. I would have had a transparent view of the growth of my investment. I would have also had power to liquidate it at any point after the three-year lock-in.
I Avoided Equity Till My 30s
In some ways, my safety-first approach helped me create an emergency fund. However, in relying on only low-risk, low-returns investments like endowment plans, recurring deposits and fixed deposits, I missed the chance to create wealth at an accelerated pace. For example, a monthly SIP of just Rs. 3,000 over 14 years returning an average of 12% per annum would have provided me Rs. 13.09 lakh which would have accelerated my savings. The same investment with a 10% annual step-up (where the monthly contribution increases after every 12 months) would have created a corpus of Rs. 21.82 lakh. This is to illustrate that equity allows you to invest small and yet create sizeable wealth in the long run. I corrected my habits in my 30s by initiating an SIP. However, I’ll not get the power of compounded returns of 14 lost years.
I Bought Health Insurance Very Late.
Lastly, I cannot overstate the importance of health insurance. It should be the first financial instrument anyone should buy. What’s the best time to buy it? Thirty days ago. What’s the next best time to buy it? Today. I bought my first health policy at the age of 32, only after an incidence of cancer in the family. Realising how detrimental hospitalisation is to any family’s finances, I wasted no further time in insuring myself and my wife through a fully-loaded health cover. A health crisis can strike anyone at any moment. When it does, it will drain their life savings very quickly. It would be foolish to not have health insurance in this day and age, with incidence of cancer and various lifestyle diseases all around us.
The writer is Head of Content, BankBazaar.com