Are You Investing In The Right Product For The Wrong Reasons?
An Ameriprise survey that was conducted nearly 9 years ago in 2013 had conclusively proved that we Indians invest in the right areas, but for the wrong reasons! Needless to say, very little has changed, even several years later. Here are five ways in we continue to repeat the same pattern. Watch out for them.
Insurance as an Investment
Because we continue to view life insurance as a savings tool, we continue getting trapped into fruitless endowment plans or high cost ULIP’s that often deliver sub-par returns. In fact, most people are still unable to grasp the concept of paying a premium but “not getting anything back in the end”. Remember, the purpose of Life Insurance isn’t to save money or create wealth for you, but rather to safeguard your dependants in the event of your unfortunate death. Stick with pure-risk term insurance plans only.
Equity Funds due to lower taxation
Many tax-conscious investors shy away from lower risk debt funds simply because of their relative tax inefficiency. Needless to say, choosing any asset class that’s unsuitable basis your risk profile can only have poor consequences for you in the end. Low risk takers are not mentally geared to ride the inevitable volatility that characterizes equity markets, and the behavioural gap in returns end up being huge. For best results, make ta efficiency a secondary consideration.
Health Insurance for 80D
Burgeoning lifestyle diseases and steeply escalating medical costs have made Heath Insurance a non-negotiable aspect of our Financial Plans. However, if you plan to take up Health Insurance just to save taxes, you’ll likely end up falling short in your evaluation, and end up choosing the “cheapest” plan available without regard to its features (or lack of them!). Spend time evaluating your Health Insurance purchase decision carefully – it’s likely to become your companion for years to come, as portability is still low and accrued no claim bonuses are hard to give up. Don’t make tax saving the cornerstone of your buying decision.
ELSS Funds due to their lower lock in
The recent proliferation of Mutual Funds as an asset class, have seen many investors jumping into ELSS Mutual Funds (that qualify for an 80C deduction) purely because of their shorter lock-in period of three years. However, this is a wrong move on two counts – one, the three-year lock in period doesn’t mean that three years is an optimal holding period. There may well be times when the three-year lock in finishes amidst the throes of a bear market, and you’ll be required to extend your holding period by another couple of years or more. Second, ELSS funds are essentially high risk in nature, and may not be suitable for you in the first place. Make sure that you understand the risks before you invest.
PF for your golden years
The trusty old PPF never seems to wane in popularity. Any why not – it gratifies our age-old need for capita safety. And in a way, the PPF could form an important part of your overall asset allocation, with it’s potential to deliver a tax free 7 per cent plus return. However, investing into the PPF for your retirement is an exercise in futility, as you’ll be sacrificing 3-4 per cent extra per annum that you could have made by taking a higher risk and investing into equities instead. After all, the long-range nature of a retirement goal makes it absolutely ideal for equity investing; and the 4 per cent annualised difference can add up to a factor of 2-3X over a period exceeding two and a half decades!
