financial myths: Common money myths and the truth behind them

As ET Wealth completes 10 years, we present the compressed wisdom of this eventful journey. Here are the best stories from the decade on money management.

7 money myths busted

Investors have several misconceptions about financial matters. Here are seven common myths and the truth behind them.

  • Online purchase of insurance can fetch you a good deal

Premium may be lower due to reduction in insured value, change in plan features

Term plans are cheap and the cost reduces significantly if you buy online. However, you may not get such discounts when buying medical, vehicle or travel covers. Though online distributors claim that one can save a huge amount by buying motor insurance online, the low premiums are often due to a drastic cut in the insured declared value. If you are buying medical or car insurance online, make sure you check the features of the new policy.

  • Holding funds for long term harnesses the power of compounding

Equity and MF returns are not fixed

Mutual funds have given good returns over the long term but this has nothing to do with the power of compounding, which is the addition of interest to accumulated interest. Mutual fund returns are not fixed and can vary. MFs have also given negative returns in some years. Since MFs do not offer interest, the concept of compounding does not apply to them.

  • Online mega sales offer fantastic discounts

Discounts are no better than those offered during routine sales

The ‘super-saving deals’ you are dying to bag are not as lucrative as e-commerce portals would want you to believe. A study found the average selling price of products on shopping websites during sale days is just 17% lower than normal. This is not a significant cut, considering the routine sales that go on throughout the year to push unsold stock.

  • SIP is safe. You won’t lose your money

SIPs only reduce risk of equity investing but don’t remove it

Systematic investment plans safeguard against market volatility and help average out costs over time. But they are not a guarantee against losses. They mitigate the risk of equity investments but do not remove it. SIPs inculcate discipline. You benefit from SIPs by staying invested over different market cycles. A downturn is always followed by a rebound, which is when your investments stand to gain.

  • The tax-free corpus from insurance is a major benefit

If an investment earns less than inflation, indexation makes it tax-free

Insurance companies and distributors tom-tom the tax exemption to maturity proceeds of insurance policies. However, this is not a big deal. Any investment that earns less than the inflation rate will anyway be made tax free if it is eligible for indexation. Indexation takes into account the inflation rate during the holding period and accordingly adjusts the acquisition price upwards.

  • Too many credit cards push you into a debt trap

The number of credit cards has no bearing on your spending

Many feel that owning more than one credit card will lead to overspending. That is not true. It is a characteristic trait and one can live beyond one’s means even without plastic. Multiple credit cards also have benefits. Multiple cards give you a higher credit limit that, in turn, reduces your credit utilisation ratio. This plays a major role in calculating your credit score.

  • Small savings schemes offer fixed returns

Rates are market-linked and change every quarter

For the average investor, small savings schemes are synonymous with zero risk and assured returns. However, even though small savings schemes offer safety, the returns are no longer fixed. Interest rates offered on small savings schemes are linked to government bond yields. So, they are market-linked now, with rates revised every quarter.

(Originally published on January 21, 2019)

Financial lessons from a 89-year-old investor

Uncleji was 89 when he passed away, leaving behind a portfolio of wealth that is a classic case study on bequest to the next generation. Uncleji did not dabble in stocks or buy on tips. He believed post office schemes were the best choice for the retired. In 2006, he began to invest in mutual funds.

He divided his money into three portions. One was for his use; one for emergencies and one was for passing on. The amount he wanted to pass got invested in an equity fund. The one he kept for unexpected events was invested in a balanced fund. The portion for his use remained in the post office and in bank deposits.

He put in money when the markets fell. The money was for his grandson who was just 20. That boy would live to see the markets soar, so let’s take a bargain, he said. He made every investment for his children or grandchildren in their name. For his grandchildren, he went through the process of third-party cheque issuance, opening of a folio in the name of a minor, and made sure the investment was in their names. He invested for his two children, but he made them joint second holders in investments he managed.

He would open the account or folio with a small amount. That required the second joint holder’s signatures. Then he kept adding to that folio as he desired. He made sure that the two folios were identical in their holdings so that their value would always be the same. His investments grew at 13% compounded per year, over 12 years. Not a mean achievement at all.

Now, all that his children have to do is submit a copy of the death certificate to the mutual fund and ask for the first holder’s name to be removed from the folio. He ensured that his bank deposits and investments were simplified. He kept a single paper list of the investments, complete with all details. He updated the value every year and placed that paper in the file.

(Originally published on August 13, 2018)

Do you have money fights with spouse?

If trust is the foundation of a stable relationship, Indian marriages could be on shaky ground. Only three out of 10 people completely trust their partners on money matters, according to a survey conducted by ET Wealth. The online survey received 550 responses from married or betrothed individuals across age groups.

Nearly 26% of the respondents also said their partner was secretive about financial matters, which led to arguments over money. But it was still at fourth place among the biggest reasons for financial discord in households. Topping the list were overspending or being too frugal, followed by financial support to relatives and friends.

Overspending is seen as a villain because it’s visible in the pile of unnecessary stuff lying around the house. But experts say this is not a problem if you save and invest for your goals. “If you meet your commitments, there is no problem. Spending is not a crime,” says Priya Sunder, director, PeakAlpha Investment Services.

But there can be problems if overspending affects saving and pushes you into debt. RBI data shows that Indian households’ outstanding personal loan and credit card debt was `6.43 lakh crore as on Nov 2018. “Overspending will not affect household savings if you invest at the very beginning of the month,” says Renu Maheshwari, CEO and principal adviser, Finscholarz Wealth Managers. “It will reduce liquidity and prevent overspending.”

WHY COUPLES ARGUE… Top reasons for money clashes

couples-argue

Moreover, by quarrelling about overspending, most people may be barking up the wrong tree. Few debate the investment choices of their partners, which could have a bigger bearing on the family’s finances than anything else. Less than 23% have arguments on that count. Not clashing over investments is not an indication of implicit trust in each other’s investment choices. Rather, it indicates a bigger problem – couples fail to comprehend the long-term outcome of their investments.

The survey further shows that arguments over wrong investment choices take place more in the 45-55-year age bracket than among younger respondents. This is the time when people are liquidating investments for goals such as a child’s education or wedding. But by then, it is already too late for course correction. If these investments were debated when they were in their 30s, it would have been possible to get back on track.

Few young couples discuss and debate investment choices. Either they don’t realise the urgency of goals that are far into the future or have poor financial knowledge. “A lot of our clients leave investments completely on their spouse because either they don’t understand it or the high-earning spouse has assumed complete control over investments decisions,” says Vipin Khandelwal, founder of Unovest, a financial advisory firm.

But these people are still in a better position than the 11% of respondents who said they never discussed financial matters with their life partners. They have not been included in the analysis.

(Originally published on February 25, 2019)



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