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5 Popular Investment Myths

IndianMoney.com Research Team | Updated On Wednesday, December 04,2019, 03:26 PM

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5 Popular Investment Myths

 

 

Investments are crucial if you want to enjoy financial freedom. Financial freedom is the power to live life on your own terms. You have the money to chase your dreams. There’s a popular thumb rule. Save at least 30% of your salary. Saving alone won’t make you rich. Good investing can. While investing brings financial freedom, it’s crucial to dispel popular investment myths.

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5 Popular Investment Myths

1. I am Too Young to Invest for Retirement

Most young people never invest for retirement. It’s for the old they say. The best time to invest for retirement is the first salary of your first job.

Why save early for retirement? If you don’t save for retirement, you can never enjoy financial freedom.  You will have to work well into the ’60s. Let’s say you are 30 years old and spend Rs 40,000 a month. Assuming average inflation of 6% over the next 30 years, you will need Rs 2.3 Lakhs a month to meet expenses at 60. How will you get this money when you are not earning?

Well, if you invest just Rs 10,000 a month for 30 years in a good mutual fund scheme through SIPs, you can accumulate a corpus of 2.3 Crores. You could manage with this amount for a decade after retirement.

See Also: Types Of Investment Plans

2. Fixed Deposits are a Safe Investment

It’s popularly believed that fixed deposits are safe. Now, FDs give just 6.5% to 7% a year. This is believed to be a guaranteed return. But, are you really profiting from this investment?

Take a look at retail inflation measured by CPI. CPI inflation was 4.62% in October 2019. With Onion prices hitting Rs 120 a kilo and beyond in most cities, inflation is only going up.

To calculate the actual return from FDs, you need to know the real rate of return. This is basically an inflation-adjusted return.

Real Rate of Return =        1+ nominal rate       -   1

                                               1 + inflation rate

Let’s say your FD gives 7% returns a year. Assume inflation of 5% a year. So, what is the real rate of return?

Real Rate of Return = 1+0.07/ 1+0.05 – 1 = 1.9%.

So, this is your real rate of return from the FD. It’s just around 2%. Your money is safe, but are you getting returns?

See Also: Best Investment Plan For 3 Years

3. Stock Markets Can Earn Me Fast Money

This is a common myth among investors. Stocks can make me rich really fast. Never invest in stocks unless you plan to stay invested for at least 5 years or more. Stock market is an excellent investment to transfer money from fearful or greedy investors to balanced and rational investors. Be calm, patient, disciplined and rational when investing hard-earned money.

4. I Invest Only to Save Tax

There is a large group of people out there who only aims when investing is to save tax. They don’t bother about anything else. Don’t compromise on important financial goals like retirement, children’s education or marriage when looking to save tax.

Now, you have invested in the 5 years tax-saver FD to save tax under Section 80C up to Rs 1.5 Lakhs a year. Tax-saver FD gives similar returns to normal FDs. This is around 6-7% a year. Yes, you are saving taxes, but are you achieving financial goals?

Equity Linked Saving Scheme or ELSS is an excellent tax saving instrument. ELSS invests most of your money in stocks. So, invest in ELSS only if you can manage risk in investments. (Invest based on risk-profile). Invest in ELSS under Section 80C up to Rs 1.5 Lakhs a year and save up to Rs 46,800 in taxes. ELSS also has the lowest lock-in of just 3 years among tax-saving instruments.

How ELSS save taxes? You can save taxes if you fall in the highest tax brackets. Let’s say you are in the 30% tax bracket. You save Rs 1,50,000 * 0.3 = Rs 45,000. Add cess of 4% and the figure comes to Rs 46,800. With ELSS you hit 2 birds with one stone. ELSS saves tax and offers good returns. Some ELSS funds have given returns in excess of 15-17% a year.

See Also: Why Women Need to do Financial Planning?

5. Over Diversification Protects My Portfolio

Diversification is great to protect your portfolio. It’s spreading eggs across baskets. You invest in stocks across sectors to protect the portfolio. But, over-diversification is a problem. There would be too many stocks and mutual funds to manage. This is detrimental to the portfolio. It would be wise to concentrate on a few stocks and diversify with them.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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