Some common misconceptions about investing

A right approach towards investments can be your starting point towards your financial goals. While your investment mix may not always be perfect (who has!?) it is good to understand different investments, how they work and how they can help you achieve you financial goals. Before that, it is important to dispel some common misconceptions about investing, and hopefully base investing decision based upon understanding  of how that investment works rather than hearsay!

common misconceptions about investing

Here are 6 common misconceptions about investing which people often have.

1 Insurance policies are good investments.

Just that many people invest in insurance policy like endowment policy or ULIP doesn’t necessarily mean that they are good investments. They are good investments for the agents though who get hefty commissions. Do your own math on the rate of returns they offer. Many of them won’t be able to beat fixed deposits. In case of (stock) market linked policy, better to invest in market linked instruments like mutual funds. And the insurance cover too is very small, in case that is made a selling pitch. Term insurance provides much better insurance cover at much lower cost!

Just to reiterate – Do not mix insurance and investments. You end up doing injustice to both. 

2 Investing in stocks will make me rich.

Not all stocks are good investment. Some may give good returns and work well for compounding. That investing in stock markets is a sure shot road to riches is a common misconception about investing! However, it is also true that many people have gotten wealthy over a period of time by buying and holding good stocks.

While equities have historically done well over a long time horizon, and will hopefully continue to do so in future, there is no guarantee. At the same time while many stocks have done well and created wealth, there have been stocks which have destroyed wealth. So if someone has invested (and stayed invested) in companies HDFC or Titan or Britannia few years back, would be currently sitting atop a decent amount of wealth. At the same time if you had been an investor on companies like RCom, Suzlon or Kingfisher Airlines, your wealth would have been almost completely eroded.

For someone who doesn’t follow markets regularly or doesn’t have understanding should take mutual find route. Better to let the professionals decide! Again, they may be profitable or may not be. But in long run, as economy grows (hopefully!) they should be able to identify a good basket of stocks and hence (hopefully!) give good returns.

3 Real estate is the best investment option

Real estate is often touted as great investment option but it may or may not be true. Neither is the “fact” that it always appreciates. Nor does rental income match the home loan EMIs!

Before you think of investing in real estate do some math on real cost of investing in real estate. And then check your readiness of blocking a significant chunk of your cashflows and net worth to one asset. 

Here I am not considering real estate for living. Primary residence is more of an expense than investment.

(Related – When should you invest in home … And when you shouldn’t)

4 Fixed deposits are for losers.

Fixed deposit returns can probably help you get returns close to the inflation rate. Maybe not even that if you consider lifestyle inflation and tax rates. Or in the years when inflation is on higher side.

Yet they are helpful if you want to park money for a small period of time. Stock markets may be too volatile if your time horizon is short. Fixed returns may also work fine for senior citizens who don’t have too much tax liability and typically get a slightly higher interest rate. 

Fixed deposits may inadvertently turn out to be good investment if stock markets/ give negative returns and fixed deposits are only ones giving positive returns that year. It is not uncommon. Most of us can’t predict this though.

One more thing to note is that there may be better investment options providing capital protection but with better net returns (considering taxes) in all likelihood (e.g. liquid fund, PPF – though it has a long lock-in period)

5 Gold is a great investment option

While gold and silver forms a big or small part of many investment portfolios, the jury is still out on whether it is a a good investment option. However,  it is believed to be a hedge against really bad economic times when other asset classes may be rendered worthwhile. In recent history, most of the major economies hadn’t had the need to.

Another argument in favor of gold is that it can be liquidated whenever needed. Again, this is true to an extent, but form returns on investment point of view – the actual selling price maybe slightly different, especially if gold is in form of gold jewelry! Add to that, sentimental value attached to gold, which sometimes makes it difficult to get rid of even in not-so-good times!

6 I will invest once I have enough savings.

If you are living beyond your means, you are unlikely to invest. Forget that, you’ll probably need to play a catch up game just be be able to invest, because you’ll probably be accumulating debt and be paying off EMIs!

If you are unable to save (and invest) when earnings are less, you are unlikely to do so if your earnings increase. You may be too busy chasing lifestyle! (Assuming that you have an OK income to begin with, which can at least cover your basics)

Ideally saving and investing should start not too late after you start earning. If you have a decent source of income, you can probably in a position to save and invest money.

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Disclaimer – My objective here is not to give investment tips or suggest an investment mix but to throw some light on the misconceptions about investing

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