Source/Contribution by : NJ Publications
We have our viewpoints about people, places, things and a variety of other stuff in life. Men look feminine in Pink, Chinese is better than Italian, or the other way round, hills are more serene than beaches, and vice versa, and likewise. We cling on to our ideas and perceptions, and over time they become fundamental to our existence. Our perceptions are influential in character and control our decision making ability. They become so inherent to our nature that it is difficult to think and take decisions from a neutral mindset. Likewise, many of us have also developed some perceptions about investing, which are mostly misconceptions, they have hampered our decisions and have undermined the growth numbers of our investments. In this article, we have listed and have tried to debunk three most common myths associated with investing:
1. My traditional life insurance policy not just saves tax, but also provides Life Cover as well as Creates Wealth: The primary reasons behind investors buying traditional life insurance policies is they fall under Section 80C of the Income tax Act, along with PPF, NSC, FD, etc. And secondly they serve the dual purpose of investment as well as insurance. But the irony is a traditional endowment policy practically doesn’t serve the purpose, it isn’t good at any of the above.
Facts:
1. Yes, the traditional endowment policy does save tax, but that’s the only real return you get out of it. The return numbers are so petty that they may barely cover inflation.
2. The cover that these policies provide is again highly inadequate to take care of your dependents’ needs for a long period of time, vis a vis the high premiums you pay. The modern term covers are much more affordable in terms of premiums and the cover provided also justifies the term ‘life cover’.
3. And Yes, you will get your investment back if you don’t die after a certain period of time, but as indicated above the returns are slim, so the corpus you will get will also be modest. The modern ones won’t give you your money back if you don’t die, but they will serve their purpose, provide Adequate Insurance.
The best way to Invest in Equity is through IPOs: Many investors believe that investing in IPOs is the sure shot formula of making big bucks quickly. And this is the reason why the markets are flooded with IPOs in bull market conditions, companies want to capitalize on the positive market sentiment. People have made tremendous money in IPO’s, but we must remember that not every IPO is D-Mart. If some investors have made money, many others have also lost money in IPOs. Investors aim to enter at low prices, but the reality is the IPO stocks are already overvalued when they enter and they lose money when they list and the prices correct to reflect the true value of the stock. Investing in Equity is not based on profiting from a day’s volatility, the right way of investing in Equity is by focusing on the fundamentals and profiting from the long term growth of the company.
Lower the Price, Higher the Returns: Investors want to Buy Low and Sell High. On this basis many investors believe that a cheaper stock is a better deal than an expensive stock. But the reality is a Rs. 10 rupee stock could be expensive and a Rs 1,000 stock could be cheap. The price of the stock is based upon it’s fundamentals, it’s management structure, it’s past earnings and future earnings potential, the debt equity ratio, etc. If the fundamentals are strong, the Rs 100 stock is capable of growing spectacularly and vice versa. The same applies to Mutual Funds also, lower NAV’s don’t mean that the fund is cheap or expensive, it reflects the fundamentals of the underlying stocks and other securities. Do not base your decision of investing in a Mutual Fund Scheme on it’s NAV, NAV is just the price of a unit of the scheme, concentrate on your needs and try to match them with the fund’s characteristics and investment objective. Your financial advisor will help you selecting the perfect fit for you.
