Know the Myths and Realities of Investment Planning
If you are an investor, whether working in a salaried job or a self-employed business person, chances are that you are making some all-too-common investment mistakes. It is important to know the myths and realities before you invest your money. Here are some very common mistakes that you might be making in your investments:
Investing in ULIPs without advice
ULIP investments are different from conventional insurance instruments, as the returns are non-linear and market-linked. This means you have to be prepared for low and negative return phases, which you might not have been habituated to in other instruments. It is essential to have a proper financial advisor when you are investing in ULIPs. You don’t want to have a disorganized portfolio; you need to select your fund options carefully after assessing the risk and requirements. It is also important for you not to invest simply on the basis of short-term past returns. Do not buy ULIPs on an impulse as it is a long-term insurance-investment plan with a lock-in period of five years.
Buying a traditional ‘old school’ Insurance Policy
Do not make the error of purchasing a traditional insurance policy, especially without thoroughly going through the fine-printed terms and conditions. These policies will barely give you the returns that you want, about 5-6% p.a. and even give you less coverage. You need to research properly before choosing an ideal insurance policy. Be aware of the risks that your policy will cover, and whether the coverage will be sufficient. Stick to pure risk options that have no payoffs in the end, such as health insurance and term insurance; and most importantly, optimize your risk cover.
Being erratic with SIPs
If you are erratically starting and stopping your SIPs to time the market, then it is a mistake. Since SIPs function on the principle of rupee cost averaging, they depend on market unpredictability to provide superior risk-adjusted returns in the long-term. So if you don’t see good returns in the early stages, don’t become impatient. It is also important to not start SIPs in too many funds; more than five will result in over diversification and will be counter-productive. Link your SIPs to your future goals and keep the big picture in mind during volatile market cycles. Instead you can increase your SIP amounts periodically, and enhance your goal-based investments, putting you in charge of the process.
Delaying Retirement Planning
It is a huge mistake to put off your retirement plan until later on. Delaying your retirement planning until you are in your 40s or 50s can cause unnecessary turmoil, stress and panic. Start as early as you can, while you are still in your 20s and 30s and at the prime of your professional life. If you begin later in life, you will have to invest even more amount to save a corpus that will provide you and your dependent family sufficient corpus; this can put too much pressure on your finances. Think about diverting most of your retirement savings into high-risk/high-return assets such as equity ULIP funds in the beginning and then gradually transitioning to debt funds.
Neglecting Children’s Education Costs
You might be making the mistake of neglecting today’s education costs. You cannot just save an arbitrary amount and get away with it; you will have to factor in the super-high inflation rates (from 8 per cent to 12 per cent) into your calculations. Invest in a goal-based ULIP that will generate the necessary corpus for your child.