Six common investing mistakes to avoid
MUMBAI: When most of the top 19 financial planners of India point to some common investor mistakes, it’s a good idea to listen. A look at the six investing mistakes people make:
MIXING INSURANCE AND INVESTMENT
Twelve of 19 financial planners said most investors mix the two. Investors use both unit-linked insurance plans (Ulips) and traditional policies or endowment plans to do this. “Many do not even understand whether what they have bought is a traditional policy or a Ulip... whether there are better products in insurance or outside that can work more effectively,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories.
BEING UNDERINSURED
Eight of 19 financial planners said they find plenty of life insurance policies in portfolios but very little cover. Shyam Sekhar, founder of MF advisory ithought, gave the example of a client who had five life insurance policies with a total annual premium of ₹75,000 and sum assured of ₹25 lakh. The person actually needed a cover of ₹2.50 crore. How much cover you need must be calculated taking into account the dent in your household income if you are not there. Advisers recommend a cover equal to 12-15 times your annual expenses or 8-10 times the annual income.
EXCESSIVE LOANS
With loans getting easier, planners are finding multiple credit cards in their clients’ wallets, and lots of rolled over debt. “Such borrowing helps in consumption by spending tomorrow’s income, today,” said Shyam Sunder, MD, PeakAlpha Investment Services Pvt Ltd.
HIGH INVESTMENTS
Real estate and gold are dominant portions of investors’ portfolios, said eight out of 19 planners. Amol Joshi, founder, PlanRupee Investment Services, said potential rent attracts people. “But rental yield in India is 2-3%; far below what other assets can generate,” he said. Gold is another favourite. But too much of gold, especially from an investment point of view, is not a good strategy. Over the past 5-year period, gold has lost 5% in value, while equities have given a return of 11.9%.
LURE OF IPOS
While direct investment in equity is good for those who can read balance sheets, we recommend going through equity mutual funds if you don’t have the wherewithal to make sense of annual reports and cash flow statements. Investing in IPOs, without understanding the company’s business, can backfire.
NO ESTATE PLANNING
Three of the 19 financial advisers said investors don’t make Wills or plan their estate. Ensure that your investments are held in joint names before making a Will. “Often, we see investments don’t have nominations,” said Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors. A Will, though, ensures that assets are rightfully bequeathed to legal heirs.