Spam Prats Dec 29, 2009 No Comments
Popular Myths Often Prove Costly. Here Are Some Tricky Ones That You Must Stay Away From.
IT WAS that year when most investors paid heavily for their costly mistakes. As we step in 2010, there are some lessons to learn and at least avoid the following 10 investment mistakes.
I CAN TIME THE MARKET
As Peter Lynch pointed out in his Investor Test, an investor who tried to time the market for the past 20 years had the misfortune to be out of stocks and in cash during the “best” 15 months. In fact, the investors had given up 76% in this period.
These highs and lows travel through quick bursts, which even a market expert is unable to time. “By chance, if an investor manages to get the timing right even once, he assumes he has mastered the art. Such investors make repeated attempts and burn their fingers,” said Suresh Sadagopan, a certified financial planner, Ladder 7 Financial Advisories.
KEEPING UP WITH THE SHARMAS
Herd mentality is a common fallacy seen among investors. There was a time when everyone believed that investing in a child plan was a rage and almost every parent believed in the instrument. The question is not whether child plan is a good option, but whether an investor knew his requirement, financial and risk-taking capacity before choosing an investment option. Keep your milestones in mind before entering into any investment.
PROPERTY WILL TAKE CARE OF RETIREMENT
If you stick to one asset class, you are exposed to higher risk and low-yield instruments. Look at a diversified asset allocation based on your age, income, future goals and risk appetite. Real estate was considered a stable and excellent asset class till 2008, and even now it is still grappling with slowdown. The same applies for equity, gold, etc. Safe instruments such as deposits or small savings cannot beat inflation over long-term and help you meet your dream corpus. A right mix of debt and equity is the right recipe, but you have to stay invested in equity for at least five years or more to earn optimal returns.
I DEAL WITH MULTIPLE BANKS & BROKERS
Even as diversification is key, you should have a consolidated view of your portfolio. There have been instances when investors have invested in similar equity funds with five different brokers. It’s difficult to find one touch point for all investments, but you can go for chosen few to keep a tab on your investments.
BROKERS MUST OFFER FREEBIES
Expecting kickbacks is very common among customers. If you try to squeeze the broker, he will try to squeeze you in return by deploying your money in less-deserving instruments. Go with quality of the advice offered by neutral financial advisors.
I NEED TO CHURN TO EARN
If a mutual fund delivers 25% return in 12 months, the investor liquidates and shifts to another fund. The two assumptions are this fund will not generate a similar return and the other fund will offer a higher return. Any mutual fund with a proven track record will generate consistent returns in line with the benchmark index.
LOW NAVs ARE THE BEST BUYS
This can be explained with an example. You buy a mutual fund at a NAV for Rs 10 during the NFO. Your friend invests in another fund from the same AMC and the NAV is Rs 100. The two of you invest Rs 10,000, of which you get 1,000 units and your friend gets 100 units. Assuming the same fund manager generates 20% return on both the funds, both of you would earn Rs 12,000 each. So it’s the performance and the track record of the fund and not the NAV that matters. In case of an existing fund, you can see the track record of fund unlike an NFO.
WHY SHOULD I PAY AN ADVISOR?
Investors are ready to pay for a product and not the service. For example, an insurance agent would be getting as high as 20% commission from an ULIP investment. This commission is factored in the product itself and the customer is not conscious of paying a higher premium. But the same doesn’t apply for a third party advisor. “In fact, it’s detrimental to pay for a product, as the commissions would influence a broker’s advice more than the customer’s need or requirement. It’s a classic conflict between value for advice vs value for products,” said Richa Karpe, director (investments), Altamount Capital Management.
I HAVE TO EARN A RETURN ON MY INSURANCE
People don’t invest in term plans because they don’t earn a return, if they outlive the policy term. “A customer is ready to invest in a child plan for child’s future, pension plan for retirement and in ULIPs for equity without realising there are better and cheaper options available in the market. Insurance is meant for protection, and customers shouldn’t mix investment with protection. Otherwise, the premium outgo would be as high as Rs 3-4 lakh, which would constrain the cash flow severely. Also these policies have expensive exit options,” added Mr Sadagopan. In the process, they stay underinsured, which is the biggest risk.
I AM 25 OR 55, HOW DOES IT MATTER?
The asset allocation gets more tilted towards debt since your risk appetite is much lower when you turn 60. For instance, the debt to equity ratio shifts from 80:20 at 25 to 20:80 at 50. This is the time to enjoy your savings rather than regret on an aggressive equity driven investment plan.