Phrases like “guaranteed income” or “guaranteed returns” are used to sell thousands of insurance policies or products because they strike an emotional chord within us. Sadly, even in 2024, many investors are unaware of the risk they pose to our lifestyle and our aspirations.
So many investors want to buy guaranteed income plans, arguing that the returns are better than FD returns (caveat: non-ULIPinsurance policies purchased from 1st April 2023 with more than Rs. 5 lakhs will be taxable as per slab).
Let us list everything wrong with these choices or, in general, such a mindset.
- A guaranteed income after retirement is a good thing, but there is no need to secure it years from retirement. Then we would only be guaranteed not to match inflation (forget about beating it).
- Such policies, fixed deposits, PPF, SSY, or EPF/VPF would only lead to a skewed fixed-income heavy portfolio. Even if much of the portfolio is tax-free, what matters is what it is worth at the time of our need, and such portfolios almost always fall short unless we have oodles of money to spare.
- This is why debt mutual funds or hybrid mutual funds are essential for long-term goals. We must look beyond returns and taxes and focus on goal-based asset allocation and rebalancing. Mutual funds score here.
- Capital market risk is essential for portfolio growth in equity and debt segments. Yes, to some extent, the fixed-income portfolio can be dominated by tax-free EPF/PPF/SSY.
When someone focuses only on the return of a fixed-income product, it almost always means they have not considered the impact of inflation. This amount needs to be invested at that fixed-income return, and whether they can afford it. The other extreme, focusing on returns from equity, is also equally wrong.
Both problems have the same origin – a lack of risk awareness. In the fixed income case, it ignores the impact of inflation; in the equity case, it ignores the past performance disclaimer about the equity market performance.
A more balanced approach is necessary where one evaluates needs by looking within and building an investment strategy that mixes caution, calculated risk and discipline. Then, we look at the products suited to the strategy.
Looking at products and then worrying about the plan is the personal finance equivalent of shooting first and thinking later. It never ends well.
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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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, 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 promoting unbiased, commission-free investment advice.
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