Topic 3: Some Of The Biggest Investment Mistakes: Planner Survey
When most of the top 19 financial planners of India point to some common investor mistakes, it’s a good idea to listen. Here are some investing mistakes people commonly make. These are money traps that you would do well to avoid.
Being underinsured
Eight of 19 financial planners said they find plenty of life insurance policies in portfolios but very little cover. Shyam Sekhar, founder, ithought, a mutual fund advisory, gave the example of a client who had five life insurance policies with a total annual premium of Rs75,000 and sum assured of Rs25 lakh. The person actually needed a cover of Rs2.50 crore. “The sole purpose of life insurance is to provide for your family in your absence,” said Sekhar. How much cover you need must be calculated taking into account the dent in your household income if you are not there. “Many investors are under-insured or overly allocate funds to insurance. For example, we often see a bread-earner and spouse both insured for similar amounts. These decisions are often made emotionally rather than pragmatically,” said Roopali Prabhu, head-investment products, Sanctum Wealth, a boutique advisory. Advisers recommend a cover equal to 12-15 times your annual expenses or 8-10 times your annual income. And stick to buying a term plan.
Excessive or expensive loans
Often people take loans when their income levels or existing investments are not sufficient to fund a so-called unavoidable expense. And with most of us carrying at least one credit card—financial planners swear some clients have half a dozen credit cards—you don’t really need to go through the process of visiting a bank to borrow money. Many of those who use credit cards tend to pay not the full amount that is due but only the minimum amount and simply roll over the rest. Eight of the 19 financial planners said that most first-time clients have excessive and expensive loans. According to an EMI calculator of loan portal Bankbazaar.com, the EMI for a personal loan of Rs5 lakh would be around Rs12,100 if you wish to repay in 5 years. But just the total interest outgo would be Rs2.29 lakh, which would be in addition to the Rs5 lakh principal.
Excessive property and physical investments
Real estate and gold are dominant in of investors’ portfolios, said eight out of 19 planners. Budget 2017 has further limited the level of set-off of losses to Rs2 lakh under the ‘income from property’ head. This can be set off against other sources of income, but only till Rs2 lakh. Additional losses can be carried forward for 8 consecutive years, but can be set-off only against income from house property to the extent of mentioned limit. Earlier, there was no limit, which incentivised many to buy a second or even a third house and pay for loans. Now, if you take a home loan to buy a second house for the purpose of renting it out, watch out.
Exotic products, ordinary returns
There is no dearth of investment products but should you own them all? And more importantly, should you invest in them despite their complexity? Five of 19 advisers told us that toxic products are a part of many portfolios. From investing in private equity funds, capital protection oriented funds or structured products, these avenues can create havoc if you don’t understand the risks they carry.
No estate planning
Three of the 19 financial advisers said investors don’t make Wills or plan their estate. Before you make a Will, we suggest you ensure that your investments are held in joint names so that it’s easier for the second holders to take over. While nominees are merely trustees of investments till the rightful heir comes along (unless there’s no legal heir or claim, in which case the money could go to your nominee), nominations ensure that the transfer becomes a smooth process. A Will, though, ensures that your assets are rightfully bequeathed to legal heirs. If you have multiple heirs, a Will helps avoid any future conflict.
Source: Livemint
Being underinsured
Eight of 19 financial planners said they find plenty of life insurance policies in portfolios but very little cover. Shyam Sekhar, founder, ithought, a mutual fund advisory, gave the example of a client who had five life insurance policies with a total annual premium of Rs75,000 and sum assured of Rs25 lakh. The person actually needed a cover of Rs2.50 crore. “The sole purpose of life insurance is to provide for your family in your absence,” said Sekhar. How much cover you need must be calculated taking into account the dent in your household income if you are not there. “Many investors are under-insured or overly allocate funds to insurance. For example, we often see a bread-earner and spouse both insured for similar amounts. These decisions are often made emotionally rather than pragmatically,” said Roopali Prabhu, head-investment products, Sanctum Wealth, a boutique advisory. Advisers recommend a cover equal to 12-15 times your annual expenses or 8-10 times your annual income. And stick to buying a term plan.
Excessive or expensive loans
Often people take loans when their income levels or existing investments are not sufficient to fund a so-called unavoidable expense. And with most of us carrying at least one credit card—financial planners swear some clients have half a dozen credit cards—you don’t really need to go through the process of visiting a bank to borrow money. Many of those who use credit cards tend to pay not the full amount that is due but only the minimum amount and simply roll over the rest. Eight of the 19 financial planners said that most first-time clients have excessive and expensive loans. According to an EMI calculator of loan portal Bankbazaar.com, the EMI for a personal loan of Rs5 lakh would be around Rs12,100 if you wish to repay in 5 years. But just the total interest outgo would be Rs2.29 lakh, which would be in addition to the Rs5 lakh principal.
Excessive property and physical investments
Real estate and gold are dominant in of investors’ portfolios, said eight out of 19 planners. Budget 2017 has further limited the level of set-off of losses to Rs2 lakh under the ‘income from property’ head. This can be set off against other sources of income, but only till Rs2 lakh. Additional losses can be carried forward for 8 consecutive years, but can be set-off only against income from house property to the extent of mentioned limit. Earlier, there was no limit, which incentivised many to buy a second or even a third house and pay for loans. Now, if you take a home loan to buy a second house for the purpose of renting it out, watch out.
Exotic products, ordinary returns
There is no dearth of investment products but should you own them all? And more importantly, should you invest in them despite their complexity? Five of 19 advisers told us that toxic products are a part of many portfolios. From investing in private equity funds, capital protection oriented funds or structured products, these avenues can create havoc if you don’t understand the risks they carry.
No estate planning
Three of the 19 financial advisers said investors don’t make Wills or plan their estate. Before you make a Will, we suggest you ensure that your investments are held in joint names so that it’s easier for the second holders to take over. While nominees are merely trustees of investments till the rightful heir comes along (unless there’s no legal heir or claim, in which case the money could go to your nominee), nominations ensure that the transfer becomes a smooth process. A Will, though, ensures that your assets are rightfully bequeathed to legal heirs. If you have multiple heirs, a Will helps avoid any future conflict.
Source: Livemint