5 Best Investment Practices
Rajinder Sharma, a young call center executive from Mumbai, got a call in his cellphone one fine day from a MNC. The sweet female voice asked whether he would be interested in a wealth creation plan that offers guaranteed returns of 15% per annum. Rajinder, earning nearly Rs.30000/- per month, was always wondering about how he could invest the surplus money left-over in his account for good returns. He is young and do not have any dependents yet and he has stocked-up a considerable amount of money in his bank’s saving account, which he wanted to invest in some secured savings scheme for the future. As the call was from the same bank he has an account with, he immediately said “yes he would be interested”. So, on the appointed day a young energetic guy came to see him and explained briefly how a small investment of just Rs.50000/- can grow to a big corpus in 10 years. In his latest laptop, the person showed a presentation, with graphs and charts, how his money will be invested in the specific plan with returns that is guaranteed. The plan appealed to Rajinder, as it specified that the returns will be guaranteed at the highest NAV achieved, no matter which way the stock market goes. That means his investment is sound and secured, isn’t it? Well, it is at least to Rajinder.
He agreed to do the investment and the energetic and cheerful person took out some forms to sign, took some photocopies of the required ID and address proofs, even took his photograph in his cellphone, which Rajinder didn’t had at the moment and bid adieu after taking the check. Rajinder was happy to make use of the fund into some good use after all. He received a call for a brief medical check-up right at his home and was delivered the “guaranteed” returns plan in about 20 days. “Nowadays an investment can be made with much ease and without stepping out from home”, thought Rajinder.
However that sense of “ease” and comfort was gone when he received a reminder mail about his annual premium dues of Rs.50000/- a year later. He wondered about what the dues are really for? He called up the same guy and was informed that it is the annual premium that he has to pay as it is a life insurance policy, an ULIP actually. He was taken aback. But he thought it’s a mutual fund and he had made a one-time investment! What about the returns then? Is it guaranteed as the guy said or not? Well, the guy said, “yes, off-course the returns are guaranteed, but you need to stay in the investment for at least 10 years to get the highest-NAV returns”. You can very well understand the aftermath of the incidents that followed for Rajinder.
Can you spot what Rajinder did wrong in the above story? I am sure you can, but let us try and list them out here:
- He should have read the fine print of the documents and the forms he signed in, particularly checking for his commitments and responsibilities if any.
- He should have kept photocopies of all the documents he signed in for future reference.
- He should have researched about the plan or the scheme offered, either online or offline, before taking the decision, particularly as to the workings of the plan and how the scheme plans to achieve the targets.
- He should have weighed the advantages and disadvantages of the scheme vis-a-vis his requirements and goals in life.
- Last but not the least, blindly trusting somebody for it’s name and reputation is a sure pitfall in any financial investment. In case of Rajinder, he trusted the company and it’s representative as he used to have his bank accounts with them.
Well, Rajinder could’ve saved a lot of trouble for himself if he had kept his eyes open when he made the investment. If you have made any such mistakes in the past, please do not be another Rajinder yourself.
Please do share your views and experiences, if you have gone through such an ordeal in your comments.
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I agree with the above comment. Returns should most certainly calculated taking in to account inflation. An FD giving 8% actually gives a miniscule return of 1 – 2% if an inflation of 6-7% is assumed (which is bound to be there). Also, as mentioned above, the returns should be annualized and not simple returns. A scenario where Rs. 100 becomes Rs. 200 in 10 years is 100% growth in simple terms. But if annualized (CAGR), the growth is just 7%. So, take in to account inflation and CAGR growth.
Coming to the main blog, I feel instead for relying on someone else, one should take care of his / her own investments. If you do it yourself, you will be by default more cautious. At the max, you will make a few mistakes, but you will surely learn from them. If it is related to the stock market (like in Mr. Rajinder's case), all you need is some portfolio management tool which keeps track of your investments. You make use of this tool and more importantly your money and no one else does it. I found this free portfolio tool on the internet (http://bit.ly/portfolio-managers). It is quite good.
So, in a nutshell it is better to take care of your own investments and not rely on anyone else. Talk to friends, relatives, collegues, etc. if you want to, but do not let anybody have your money to control it for you.
When I was growing up and was in high school I asked my dad once, (who was then a Bank Manager in a Nationalized Bank), how come his bank is giving only 8% FD return and I saw a hoarding in the bus stop – "Double your money in 4 years". He told/taught me 2 things:
1) Divide 72 by the number of years to double money and that is your approximate rate of return
2) If someone 'Guarantees' a return of more than 1-2% than a general Bank deposit it is usually bogus – they cant sustain it for long.
These 2 statements – I admit – have guided me in most of my financial life.
In the case above the returns were 18% annualized which was too good to be true.
Everyone must ask themselves when investing in a Financial product:
- What is the return I am getting?
- Can I get such returns myself? [Endowment Plan returns can easily be beaten by taking a Term Plan and PPF alone. Of course one needs access to Equity (say via MFs) to generate wealth]
- Will this money be sufficient 'inflation-adjusted'? [1 Crore is big money today; It will not be big money after 10 years, for example]
If the returns are too good and guaranteed chances are someone is staring at a black hole.