“Oh My God !! All these years I did too many mistakes while making investments which I am realising when I compiling my IT return.” Said Prithviraj, a 33 year old IT professional to his friend Niraj.
“What Mistakes you made Prithvi?” asked Niraj.
1. Investment in a ULIP
“First mistake I did was investment in ULIPs, pre and post 1st Sep 2010. Prior to 1st Sep 10, an agent told me that ULIPs will become unattractive from 1st Sep, and thus, the right time to invest in ULIPs is now. I got convinced and invested in it. Later, the same agent came with a new ULIP stating that ULIPs have become much better now and thus I should buy one more ULIP from him.
Later on I realised that both the ULIPs were totally uncalled for and were a perfect recipe to drain my hard earned money to the agent’s greedy pockets.” Said Prithviraj.
Lesson: ULIPs / Endowment Plans / Money Back Plans are all combining insurance and investments together. If you want a good life risk cover, take term plan. If you want your money to grow, do SIP. Never mix insurance and investments.
2. Taking too little risk
“Second mistake was to keep most of the money in idle avenues like savings account, bank FD, endowment plans etc for a long time.
These avenues gave me poor returns, whereas inflation kept eating my money by 8-9% every year.”
Lesson: When you are planning a long term goal, equity would come very handy to beat inflation. Keeping a very high proportion of debt in your portfolio will strangle its growth and make it sluggish.
3. Not saving / investing beyond Rs. 1.20 Lakhs
“ Third mistake was to invest solely with the purpose of tax saving. This not only restricted my choice of funds, but also restrained me from saving and investing more. I am earning close to 7-8 Lakhs per year. Having said that, my annual savings should be around Rs.2-2.25 Lakhs which may be invested in asset classes not qualifying for tax saving, but still giving good returns in the long term.”
Lesson: While saving and investing, have a larger focus on what amount you would need on retirement, than what amount is mandated by government to save tax. Ultimately, you will be doing this in your own interest. The government need not incentivise you for everything you do in your own interest.
4. Investing at a wrong time
“Fourth mistake was to invest lump sum amount every year, just before 31st March ended. This usually resulted in investing at a higher market level and could never get the advantage of rupee-cost-averaging. Also, to make this money available, the savings were lying idle in the savings account for the entire year.
Lesson: The magic of investing lies in investing regularly in small amounts than occasionally in larger amounts. The rupee-cost-averaging helps to bring down the overall purchase price, thereby growing the wealth in long term.
5. Investing without Goal Planning
“Fifth and most important mistake I did was investing without having goals and without any plans. The entire focus was on, ‘there is some idle cash with me, let me pay the premiums so that I save tax and balance can be invested in some IPOs, NFOs etc to make quick money.’
Dint realise that unless there is a plan in place, one cannot reach the desired destination if he just keeps on walking. One should know, where he wants to go, how he can reach there and then start walking towards it.”
Lesson: Rather than investing in some “Fancy-named Plans”, plan your investments. Know what are you investing for: For a Child’s education / Marriage, Your retirement , buying of assets etc. Once you have a goal, you will also know the time frame to reach that goal. This will be of great help while deciding the strategy to invest.
“Thanks for sharing your mistakes Prithvi. Life is too short to learn from our own mistakes. At least I will not repeat them. I will:
- Keep Insurance and Investments separate.
- Take adequate risk depending on my risk profile.
- Not restrict my savings and investment to the Rs. 1.20 Lakhs limit by government.
- Invest at regular intervals through SIP / STP than try to time the market.
- Work out my goals and plan out my investments.” Said Niraj.
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(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical)