friendship

Financial Frenemies – what you need to know.


August 2, 2019

Friendship Day marks the celebration of the relationship we’ve shared with our friends, old and new. It’s a journey we cherish and hope to continue for a lifetime. Just as we trust these long lasting friendships to have our backs when we need them the most, there’s another critical aspect of our lives that we need to give a lot of thought to – our money management. Savings and investments are not habits that come naturally to everyone. These are lessons we learn along the way as we grow up, start earning and are told to take care of our finances. Yes, it’s for the very same reason that we make friends for – to have something of our own and more so, enough of it to fall back on when the need arises.

If you are new to financial planning and don’t understand how to invest, what to invest in and other related queries, it’s best to consult a financial planning advisor who can guide you well with this. While family members are advisors for life, it’s helpful to seek guidance from an expert who can provide clarity to you in your journey. Amongst the plethora of investment options available in the market, it’s important to know which ones suit you the most and invest accordingly. There are various choices which may seem very obvious or the most recommended however, it’s important to do your research and understand if they are really worth investing or consider other avenues.

It’s easy to fall prey to plans or people who promise high returns with low risks. While such plans do exist, they may not necessarily be real or lucrative offers in the first place. Speak Asia and Stock Guru are two such examples of dubious schemes in 2011 and 2012 respectively, wherein very high returns aka promising to double in a span of 6 months, proved to be a red flag in itself. Ankur Sachdeva from Delhi invested Rs. 11.6 lakhs in Stock Guru in 2012. He was initially skeptical and invested Rs. 2 lakhs in the scheme. When he received Rs. 40,000 back in the first month, he invested Rs. 10 lakhs more to never have got back anything in return. A very basic principle to bear in mind while investing in any scheme is to check if it has been verified by some regulatory authority such as SEBI. Reading the fine print is cumbersome in most cases so make sure to have a lot of questions for your advisor. Anything or anyone promising unbelievable returns in a short duration should ideally not be trusted. Anything that is too good to be true is never true.

Life insurance is another vehicle which is mistaken for investment because of its triple benefits of a cover for life, long term savings and tax benefits. Endowment plans are the most traditional and very often considered to be the safest forms of investments. However, these policies not only give sub-optimal returns of 4-6%, but also force the policyholder into a multi-year commitment. While there is a way out, which is to surrender the policy if you have paid the premiums for a minimum number of years, you are sure to face a loss when you do so. These investments not only prevent investing in other lucrative avenues but also don’t give returns which do justice to such long term commitments. Not to forget, very long lock-in periods which means that you could end up investing for as long as 20-30 years where the interest is only accumulated, not compounded.

As an investor, it’s also very important to be cautious of falling prey to trading. The thrill is a given with quick high returns that trading gives however, very often most of the investors have no idea of what business the company is in or why is it that the price of a stock is going up or down. Let us look at a simple scenario. Say for example Mr. A believes that the price of Stock X is likely to go up by 10% today and hence he buys at Rs. 100. X indeed rises to Rs. 110 and Mr. A sells it off to Mr. B who also buys it with a belief that the price will rise further. X further rises to Rs. 118 and Mr. B sells it off to Mr. C. Obviously, Mr. C also wants to make money and believes that the upward movement will continue. He therefore sells it off to Mr. D at Rs. 128. This continues till that moment when the cycle breaks. The last man standing ends up making a loss. As stated above, in this cycle, there is a high probability that none of the players have any idea why the price is behaving the way it is and even the fact that someone will eventually pay a price in anticipation of the price rising further. Trading is a risky activity and is under no circumstances a medium of creating wealth. While a lot of people have made money with trading, there is no guarantee that you will be one of them.

While there are several such financial frenemies out there that can misguide investors, it’s best to start with professional help and take things in your hands in a couple of years of learning the ropes. Our expert advice is to first identify your financial goals, investment horizon and risk appetite to know how, where and how much to invest. Mutual funds are a great way to start with through SIP as they can always be tailored to your needs whether, short, mid or long term. Having a mixed portfolio also ensures that not all your eggs are put in the same basket. After all, there is no greater wealth in this world than peace of mind. So, befriend the savings habit and trust us with all your financial planning needs. Wishing you all a happy & financially prudent friendship day!

Nisha Neurgaonkar

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