In this article, SEBI registered investment advisor, Sriram Jayaram discusses 11 investment mistakes young earners and anyone new to personal money management should avoid.
About the author: Sriram Jayaraman is a SEBI registered fee-only Investment adviser. After 27 years of working in large IT companies in India, he achieved financial independence and retired early to become a fee-only advisor. You can contact Sriram via his website arthagyan.com.
1 Failure to create an emergency fund: COVID has taught us to not take our income for granted. We all take it for granted that by the first of every month we will get the salary to splurge on. How can you be sure that the salary will come on time? What if there is a delay due to problems in the company? Can you pay your EMI, credit card bills, rent, grocery bills, school/college fees etc. if there is a delay? What happens if you are laid off due to reasons beyond your control? Before you start investing, the first thing to be done is to create an emergency fund which should be a minimum of six months of expenses that include the EMIs if you have a loan. If you are in a business where your income is not regular, it is recommended to have an emergency fund of one year’s expenses.
2 Not taking term life insurance and Health Insurance: Before you start investing, you need to identify what can jeopardize your investing plan. An expensive hospitalization, an accident or an untimely death can affect any family. Hence the priority for you is to safeguard your family against such occurrences. A combination of Base health insurance and super top-up insurance will protect you from losing all savings from a hospitalization. Road accidents are on the rise. It is prudent to take accident insurance which includes cover for temporary partial disability, total temporary disability and total disability. A term life insurance will protect your dependents in case of an untimely death.
3 Taking investing advice from family and friends: Everyone starts to consider investing once they start earning and saving money. Bank savings accounts, recurring deposits and Fixed deposits are mostly the first investing products for many. This is the time when you start seeking investing advice from family and friends. Your parents will say “take a LIC policy first”. What they mean is an endowment policy from LIC. LIC was the only insurance company in India until private companies were permitted to sell insurance products about 20 years back. LIC always had an army of agents selling the endowment and moneyback policies telling us that you can double your money in a 10-year policy or triple your money in a 15-year moneyback policy and they also say your family has added protection as well. How many of us have done any detailed calculations to understand that the internal rate of return of these plans is a pathetic 5% and the insurance is for a pithy sum assured? There is always an elderly uncle in the neighbourhood who will try to sell you a policy or scheme as the latest scheme which gives guaranteed returns.
4 Taking loans too early in working life: Savings done earlier in working life has a longer time to stay invested and get the magical effect of compounding. If you take a loan and use most of your earnings to pay the EMI, then the savings will get reduced. The only good loan will be one to buy an asset like a house or a flat. Even with this kind of asset purchase, it is better to postpone it to a stage in life when you are sure to stay in the same location for at least five years. Otherwise, renting a house is an easy and flexible option. You are not tied to the job or the city.
5 Mixing insurance with investment: Traditionally, LIC found it easier to sell the endowment plan with their famous tagline “Zindagi ke saath bhi, Zindagi ke baad bhi” meaning “With you in Life, with you after Death”. They always have been pioneers to define terms like survival benefit, yearly bonus, maturity bonus etc. They found it easier to convince prospective customers by saying you get money if you survive the policy term, and in case of death, your family gets the money. Unsuspecting clients agreed that this product is brilliant and lapped it up. That was possible in those days as LIC was a monopoly. People simply did not know that there could be a term insurance policy. Today, with so many private insurers offering pure term policies, it is easy to segregate the insurance from Investment and buy the best products at the lowest cost. Term insurance for life cover is a no brainer today. But even with term insurance, you need to be careful and not choose a limited premium and Return of premium option. The regular yearly premium is the one to pay.
6 Buying stocks on tips: How many have lost money in the bull runs in the past? During the Harshad Mehta scam days of the 90s, there were stories of people selling their properties and investing in stocks based on tips and then losing it all within days. There was another boom and bust in the K10 stocks during the Ketan Parikh created bull run in the late 90s. Stocks of dud companies like DSQ and Silverline and Himachal Futuristic had run up to the stratosphere only to come crashing down within days. These companies, more or less wound up in a few years. Spare a thought for the gullible small investors who had put their life savings to end up losing their shirts. These boom and bust cycles are a reminder to everyone that history rhymes. Today, we are in much safer times with all trades being paperless and the watchdog SEBI doing their best in investors’ interests which was visible in their handling of the Karvy crisis.
7 Trusting your bank relationship manager: Most private sector banks and some PSU banks have this practice of appointing the so-called relationship managers. Many of us fall for their charming, sweet talk and that they work in our interest. Their real work is to convince you and sell commission generating insurance products and regular plans of mutual funds. How many stories of misselling of ULIP plans and endowment products have we heard or seen? Senior citizens are made to invest their pensions into ULIPS. They have even been convinced to take the insurance in their working son or daughter’s name so that IRDA rules allow it! All of us need to block the relationship managers’ calls and stop picking up their calls. This is for our own good!
8 Falling for the latest fad: Investing need not be exciting. The more boring, the better your returns will be. Futures and options are very exciting indeed! You can make a lot of money very quickly! You can also lose your capital quickly! There are many who have invested in digital coins like bitcoin and other ICOs. The recent fall in bitcoins and cryptos has taught a lesson to many. Sector funds of certain sectors like Digital are now the in thing! People who had invested in Infrastructure funds a few years back when it was in the limelight have certainly learnt their lessons. Every year will have a new fad. Do you want to invest in it to learn a lesson? It may be easier to learn it based on others’ experiences.
9 Investing too much into Real Estate: Historically, real estate has given fantastic returns in the stories that we hear from people. Cash deals and other issues have plagued real estate for ages. When such stories are narrated, the costs for maintenance and taxes are completely forgotten. Also, there are stories of land grabs where the actual owner could lose the land bought with life savings. Of late, we have heard of people investing in multiple projects from reputed builders. Some of these reputed builders have delayed construction and even after several years, the completion of the projects is only in their dreams! With RERA being implemented, there is now some transparency and projects under RERA are progressing as desired. But even then, investing in multiple flats where rental yields are between 2.5% and 3% defies logic! The best thing for you is to buy only one house or flat only if you are certain to live in it. Else, better investment avenues are available.
10 Investing without a plan: “I want to invest Rs. 10,000 in SIP. Which is the best fund to invest in?” has been a standard question in Asan Ideas for Wealth, the Facebook group dedicated to Personal finance. One must have a clear goal before starting to invest. What are your goals? How many years away is the goal? How much is to be invested in which assets to reach the goal in the given timeframe. These are the questions you must answer before starting investing. Once you have a goal and an asset allocation in place, the difficult part of the job is done. The easier part is to find which products to invest in.
11 Not writing a will: As Subramanyam of Subramoney.com says those who will not die or know when they will die, need not write a will. Death is a certainty for everyone; the only thing unknown is when that will happen. It is your choice if you want to decide who takes which parts of your assets. Otherwise, your religion and the laws decide how your assets will get distributed. Your job does not get completed when you set up the nomination for your assets.
As per law, the nominee is only a caretaker of the asset till the legal heir takes it over. It is in your best interest to write a will and make the transfer of your assets to your loved ones smooth. What are your excuses to postpone writing a will? It is too complicated. I need to contact a lawyer. I need to pay to get it registered. Is writing a will complicated? Not at all. All you need to do is make a list of assets and specify who gets what in what ratio. You don’t require a lawyer.
A lawyer could help to make the will unambiguous and in the correct format. However, it is not necessary to get a lawyer’s help. You do not require to register the will. If you register a will and decide to re-write it at a future date, you need to re-register it.
I wish you the best of luck in your investing journey!
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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