Keys to investing right

HOW WISE ARE YOUR INVESTMENT PLANS? do tHEY BRING you THE REWARDS YOU’RE PROMISED OR YOU HOPED FOR? finance expert Suresh Sadagopan offers insights to Poonam Ahuja on how to make the most of your hard-earned money.

For most people, investments largely mean going to great lengths to save tax, sometimes even borrowing money to make those investments. Usually, we leave the money lying around in banks or invest it in insurance, Public Provident Fund (PPF), property, land, gold, fixed deposit (FD), bonds, etc. Or we rush to invest in equity when the markets are going up or when everyone else is investing. As is commonly seen, investments are mostly made without factoring the risks inherent in the asset classes that we invest in, without understanding the losses that may come our way. For instance, most of us still invest in an FD, without realising that the 9 per cent interest it fetches would effectively yield only 6.3 per cent after tax.

Uneducated financials

According to finance expert Suresh Sadagopan, Founder, Ladder 7 Financial Advisories, financial education is the need of the hour. “One needs to invest time and energy in understanding finances,” he says. “In the long term, this investment would be worth its weight in gold.”
Below, Suresh lists some commonly observed errors most of us make while investing.
The herd: Investing in something because it is doing well in the market and everyone else is doing so
“This is a major mistake people usually make while investing, and is a typical behaviour seen among financially illiterate investors,” says Suresh. “For instance, if gold prices slip, everyone rushes to invest in gold, or when the stock market does well, everybody tries to throw in their money in equities, ignoring other investment options. It is imperative to understand that a product cannot be bad or good overnight.”
Tax-saver investments: Investing only to save taxes, thereby using tools or options one may not require or that don’t help grow your money.
“From the point of view of recycling, people put money all over in order to save tax, a fundamental mistake,” adds Suresh. “So some people decide to park their finances in investment plans without really assessing whether or not they need insurance. Do not invest only to somehow save tax.”
Peer-pressed portfolios: Investing without fully factoring in one’s financial goals and doing so based on one’s friends’ or colleagues’ plans
“Some rely on distributors or make random investments based on the suggestions made by colleagues, friends and family, without really applying much thought on whether those investments are suitable for them or not,” cautions Suresh. “Not understanding the nitty-gritty of your financial goals can be detrimental to your finances.”
Sales-talked: Giving in to sales-talk without making an effort to understand a product or to study the brochures and illustrations
“Though many are aware of the investment options available today, most of them do not make an effort to understand their features,” explains the expert.
“So they depend upon distributors to provide advice when investing in, say, a child-plan insurance to meet the goal of child education, and do so without making an exhaustive study about the possible alternatives.
“It would do well to remember that any salesperson comes with an agenda of selling policies that bring him profits. So his advice, positioning the said product as the best or the only alternative for your requirements, may be self-serving.”

Points to consider when investing

Liquidity risk
Invest in an instrument compatible with your liquidity needs. For instance, even though products like property, public provident fund (PPF) or fixed maturity plan (FMP) are inherently good, investing in them may hamper one’s liquidity.
Volatility risk
Seek investments in volatile products only if one has a long investment horizon. Investments like gold, equity and property may be volatile but may offer good returns only over long timeframes.
Conservatism
It is wise to keep your money safe, but do so without being too risk-averse, especially if that conservatism may result in getting low post-tax returns. Moreover, that risk-averseness might degrade one’s investment in the face of inflation.

Suresh’s pointers
– It’s never too early to start nor too late.
– Be clear about the period and goals of your investment, as also whether you hope for liquidity or are comfortable locking in the money for a period.
– Understand the taxability factor. For instance, the tax you will have to pay on an investment for
an expected net return.
– Calculate your returns on investments correctly.For instance, an FD for five years, offering 9 per cent compounded return, would offer 53.8 per cent returns at the end of the tenure. However, it is wrong to assume annual returns to be 10.77 per cent, by dividing 53.8 (the percentage returns) by 5 (the number of years). The returns are, in fact, only 9 per cent, compounded.