Top 7 myths about personal financial investment! – Trak.in – Indian Business of Tech, Mobile & Startups
Call it the magic of positive sentiment in 2010. Almost every asset class has seen significant gains over the past year. Most notable was commodities which outperformed all asset classes due to supply constraints and the weak dollar.
As the new year dawns, investors are eager to cling to new investment avenues based on the changing dynamics of different asset classes. Moreover, as perceptions change over time, with time also evolves new principles and monetary landscape. The global recession has forced investors to reassess how they use their personal finances and spending habits.
In the words of John Maynard Keynes,
“the difficulty is not so much in developing new ideas as in escaping old ones.
So, at this juncture, it is worth dispelling various imbibed misconceptions towards different asset classes before investors go all out for them on the back of the strong emerging market rally and rebound prospects. growth in advanced economies.
Myth 1: Gold is the best place to look for security
Most risk averse investors want to invest in gold for its safe haven characteristic. A number of investors and major central banks had included the yellow metal in their portfolios after the US recession mired the outlook for global economic health.
This dramatic increase in demand drove gold prices up by leaps and bounds. Gold rose from a low of $250 per ounce at the start of the decade to $1,400 per ounce in 2010. To put things into perspective, the shiny metal jumped 28.8% to become the best performing asset in 2010 alone.
Thus, gold has joined the same trend as equities, real estate and emerging markets in terms of returns for investors. It can no longer be labeled as a safe investment after the meteoric rise it has witnessed recently. The price of gold is high now, so like every other way of investing, people think it’s great.
Truth: Traditionally, gold is characterized as a safe haven investment. But, with its dramatic price spike over the past few years, it is no longer a safe destination to park your funds at the current high levels.
Myth 2: Real estate behaves differently than other investments
Any asset class in the midst of a secular bull run is almost always supported by supply constraint reasoning in the industry. The real estate sector is most strongly committed to this axiom driven by a limited supply of land ready for development.
Real estate agents often say that rising interest rates will not end the desire to buy property in an undersupplied housing market. However, builders have been reluctant to lower house prices despite the accumulation of unsold inventory, leading to increased consumer resistance and the prospect of lower demand in the real estate sector.
At times like these, buying a home with the intention of making speculative gains could be high risk in the real estate industry. A national year-end survey conducted by Makaan.comone of the leading online real estate consultants, has shown that 55% expected residential property prices to correct by 20% or more in 2011.
Truth: The earth is indeed a scarce resource, but this logic only works in the long term. The long term is a misleading guide to current affairs; and that in the long run, we are all dead. It is therefore preferable to consider and evaluate the supply-demand equation that currently prevails rather than to opt for arbitrary investments based on the idea that land is a limited resource.
Myth 3: New fund offerings are cheaper than existing fund NAVs
Investors are often fascinated by new fund offerings (NFOs) in the mutual fund industry. But, the fact remains that an NFO is not cheaper than an existing fund simply because it is open for subscription at face value. The biggest disadvantage of NFOs is that they have no past performance history.
However, if the fund house offers a new concept that suits your investment profile and your financial objective, it may be a good idea to go there. For other offerings, it might be better to wait at least two quarters of reviewing the performance of the new fund before starting.
Truth: Investors often make the mistake of correlating an NFO with that of a stock’s initial public offering (IPO). The fundamental difference being that companies that come out with an IPO are already operational in nature, while NFO aims to make a fresh start by accumulating funds from investors.
Myth 4: ULIP is a bad investment product
Unit-linked insurance schemes (ULIP) are investment products that offer both the benefits of life insurance and a savings element as a single solution for an individual’s financial goal. In the past, these hybrid plans have been harshly criticized for the uneven distribution of product cost structures versus premium allocation burdens.
Until now, the upfront costs of these insurance products have been high due to pre-loaded commission structures and fund management fees. However, recently, the IRDA had insisted on mitigating large commissions by spreading the agent’s commission evenly over the first five years and staggering the charges for subsequent years.
The regulator has also raised the threshold limit from 3 years to 5 years of blocking period and has made mandatory a minimum guarantee for these plans. However, the size of the ticket for new ULIPs has increased slightly; now, policyholders can opt for early exit without any penalty.
Truth: Under new guidelines, the tarnished image of ULIPs has changed for the better; and becoming more transparent and investor-friendly. This led to standardized products with capping charges.
Myth 5: ETFs only invest in stocks
Exchange-traded funds (ETFs) are rapidly gaining popularity around the world. Unlike index funds, ETFs are publicly traded and trade like stocks. However, the ETF is not a particular stock, but a mutual fund managing an underlying portfolio of assets designed to track a particular index.
In the current era, ETFs have become popular for almost every asset class – stocks, debt, commodities, real estate, and a number of other popular indices. Besides index funds, ETFs can also represent unique investment products that combine the benefits of active allocation and passive execution using a fundamental weighting approach. Motilal Oswal Asset Management Company had recently launched Most M50 actionsIndia’s first fundamentally weighted ETF on Nifty.
Truth: As stock markets show increased volatility, ETFs are growing in popularity among investors of all asset classes. Thus, ETFs differ from equity index funds, its close cousin.
Myth 6: Only penny stocks can deliver multi-bagger returns
Stock market investors are always on the lookout for multi-bagger returns from small and mid caps. The term multi-bagger is used for a stock that has been at least twice or more in price appreciation in terms of the number of times the stock price has jumped relative to the size of your original investment.
The most common myth about the term multi-bagger is that such stocks could only be explored among penny stocks which are small in size and have the ability to multiply. However, this is a misperception. Investors could also find multi-baggers among well-known large-cap stocks at times when their valuations are most depressed.
Take, for example, the share price of truck manufacturer Tata Motors hit a low of 130 rupees in November 2008 due to the collapse in demand caused by the global recession. Investors who showed courage by investing at such panic lows and held their ground through the recovery phase would have achieved 10 times greater returns in December of last year.
Truth: The multi-bagger is a matter of introspection and can be sought across the full spectrum of actions. Recognizing the value, in-depth research and business understanding of a large-cap company could also provide such prodigious opportunities. Investors just need to control fear and act rationally when these stocks are in freefall during bear markets.
Myth 7: The credit card often leads to overspending
Your credit card can provide you with a convenient, simple and economical way to manage your personal finances. But, those who splurge irresponsibly using credit cards end up falling into the credit trap. People tend to forget that the interest they pay on late credit card payments is exorbitant, at 40-45%.
The cardholder should use this facility with caution after fully understanding how the credit mechanism works. The credit card offers cashless convenience for an initial 30-45 day period as well as a flexible billing cycle. After that, the interest rate charged by banks on a credit card usually ranges from 3% to 3.5% per month.
Truth: Using your credit card for purchases and enjoying the benefits of the interest-free period is fine, but exceeding the limits could land you in a trap that could be called the highest form of credit in the world of finance.
So, did you believe any of the above myths? If so, it’s time to double check now!