4 Money Traps that you should avoid falling into

money traps in investments

Investment is a behavior game. One who can control his behavior wins the game and one who cannot, keep falling prey to wrong buying or misselling.

After all, sellers have the job to sell, they will make you believe that what you are buying is the best product for you, but it is for you to understand, how and why? You can’t expect advice from the sellers. And If it is Advice then it has to be backed by proper process and Reasoning.

Today I will be sharing with you some Money traps which you need to be aware of while buying any Investment product or when you get pitched with a product.

  1. Safe Investment:

Since last fortnight, Looking at market Volatility, I have once again started receiving queries on suggestions towards Safe Investments. No wonder, markets are flooded with Fixed maturity plans these days. FMPs are presumed to be fixed return safe investment, but technically it also has its own share of risk attached to it.

(Also Read: Types of Risks in Investments)

Safety in Investments is a Myth. Every Investment product has some sort of Risk associated with it. This is what you have to accept then only you could structure out your portfolio towards growth.

The risk is not only to the capital Invested that is visible to you, but there are many risks which are not visible to the naked eye like Inflation which impacts the Purchasing Power, Interest rate movements which impact bonds prices, Default which impacts your invested capital etc.

Know your risk profile, understand the product and the risk inherent, decide if you are ready to accept the risk, plan how would you be managing the risk (If Possible), have the basics of Financial planning at the place and get going.

  1. High/Low Returns:

Future is impossible to predict. What you may be shown or you have seen was the Past returns, and past returns can never ensure future returns. It’s not a new statement, and mostly every investor knows this, but it’s easy to ignore this when you have returns on your mind.

Processes get compromised, asset allocation gets ignored, Risks got overlooked, Goals go unnoticed…all this because of your emotions which are GREED or Fear.

Product Return depends on the Investment Assets that it has an allocation in and the Inherent costs of that product.

Satisfaction from the returns would come from the expectations you have towards it and your understanding of that Asset class.

It’s easy to get mis-sold looking at the past returns (Positive or Negative). You may get into a wrong product seeing high past returns and may exit a good product seeing the recent low performance. (Read: Misbuying or Misselling?)

While Investing or Redeeming, it is important to have genuine reasons other than the Returns.

  1. It’s FREE:

The word FREE always attracts. No cost EMIs results into going over budget. Why pay for advice when you can get it for FREE. It is a very common statement that If we do it ourselves it will be cost effective.

But in Reality, as the saying goes there are no FREE lunches, in fact not even the breakfast or dinner?. Why would anyone give you anything for free unless he/she is doing Charity?

A product seller advice you for free, so if you buy something from him he will get a commission out of the product. A Mobile app makes you invest for free so in turn, it may get your contact details, so to may cross-sell other products to you. Free Insurance is something which you keep listening from insurance agents.

Even when you do it yourself, still you don’t do it for free. You have 2 limited resources with you which is Time and Money. If you save on One, you will be spending in other. You may save money, but you will spend your time. Its all about what you value and want to retain the most.

There is a cost attached to everything. Its just you need to figure out what is it and in what form is it. If that is going to bring some wellness in your life, then there’s no harm in paying it.

  1. Save tax/tax saving:

Tax is such a haunting word to most of the investors that it results in buying many unsuitable products in one’s portfolio. For them preferred investments are those which are tax-free, else there’s no point.

Post the announcement of LTCG in Equity Oriented Mutual funds, Tax-free status becomes the USP of insurance sellers. In fact, many have launched a marketing campaign to promote this feature among investors. (Read: Ulips or Mutual funds in mew LTCG Regime?)

Of course, Marketers knows what you want and many times it’s easy to create a demand when you do not know what you want.

You get into Home loan just to save taxes, you invest in NPS as it will give further tax saving, you buy Sukanya Samriddhi, PPF just because they give tax free returns, VPF looks attractive…but where does all this support your goals, and long-term growth. That you never pay heed to.

In the name of tax saving you sometimes ignores the growth aspect.

Your Portfolio should be designed as per your goals and suitable asset allocation. Tax saving or tax efficiency should be part of it and not the other way around.

Conclusion:

Sometimes these money traps are laid by mis sellers and many times your mind lay this trap for you and get you into wrong products. All this happens when you are not clear why you want to do what you want to do.

When you are clear on Why, you should have a proper process (How) to achieve the goals, and products (what) comes in the last.

Process does not let you chose wrong products, and also does not let you come out of the right ones. If at all it does, the process itself rectifies the mistake soon.

 

Let's get good with Money

Join thousands of readers who receive our newsletters and get

  • FREE E-book- "Be good with Money"
  • FREE Financial Records Organiser
  • FREE E-course on Personal Financial Planning

We hate spam. Your email address will not be sold or shared with anyone else.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.