Category: Investors Behavior

There are two types of investors.

• Category 1 – Those who invest their money manually at the end of each month
• Category 2 – Those who auto-invest at the start of each month.

Today we will discuss which option is better than others and what are the benefits of choosing the auto investment mode at the start of the month

While investing at the end of the month manually is very intuitive and sounds comfortable to most of the investors, we think that investing in the auto mode at the start of the month is much better and beneficial for an average investor.

Most people adopt the “Save whatever money is left at the end of the month” approach in their financial life, but there is enough research and proof that it does not work for the larger masses. The best option is to put your investments in auto mode and let it happen automatically each month.

Now let’s looks at the benefits of investing in auto mode at the starting of each month

Benefit #1 – You can manage your lack of discipline

Can you trust yourself in investing each month manually for the next 5-10 yrs?

If you decide to invest Rs 10,000 on the 25th of every month for the next 10 yrs, will you be able to do it consistently for the next 120 months (10 yrs X 12 months)?

Trust me, it’s a lot of work and very hard to act in a robotic fashion.

• Sometimes, you will postpone it
• Sometimes, you will feel – “Let’s do it next week”
• Sometimes, you will skip it for the sake of other expenses
• Sometimes, you will just be involved in some other tasks
• Sometimes, you will actually follow it
• And most of the times, you will just forget it

Compare this will an auto mode, where you have set up your SIP (automatic monthly deduction in mutual funds) or a recurring deposit (for those who don’t think mutual funds are their cup of tea), and the money automatically gets deducted from your bank account (considering you have the balance) and then gets invested without your intervention.

Which one of these options do you feel will be in your interest?

Most people think that each month of a certain date they will invest some X amount on a regular basis, but they are not able to do it on a consistent basis. They either lack in discipline or they are so consumed in other areas of life, that they are not able to follow what they promised themselves.

Due to this, their financial life suffers. The money does not get transferred from the bank to the investments and eventually gets spent.

Trust me, even if you are the KING of indiscipline, the auto investing will create wealth for you!

Benefit #2 – You avoid unwanted expenses

“Supply creates its own demand” – a classic principle of economics. If you have money lying available in your bank account, you will find enough reasons for spending that money.

Hence, if you think – “Let me first spend, if anything is left, I can always save/invest it at the end of the month” , it’s almost guaranteed that you will not find any money at the end (unless your income is very high compared to your expenses)

This is the reason why you should create a structure that takes away some part of your salary from your savings bank account to somewhere else which is not easily visible to you (like PPF, RD, or mutual funds).

I have devised something called a “10% margin system”, which can truly transform the way you manage your cash flow. It’s one trick that will help you save more money each month.

Under this system, you only keep your monthly expenses + 10% more in your bank account and invest everything else at the start of each month. Click here to read more on this 10% margin system.

So if you invest at the start of this month, you will shop only limited to your needs, you will not overeat outside, and to a great extent, you save on the unwanted expenses.

The whole idea is to “cut” the excess supply of money to yourself by investing it at the start of the month itself.

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Benefit #3 – It develops the Habit of Saving

One of the biggest challenges for new investors is to develop the “habit of saving” in them.

The world these days is such that it’s very easy to SPEND money on things you don’t really need. You spend on mobiles, gadgets, parties, traveling and consuming various things (nothing wrong in these things). However, beyond a point, you start crossing the limits and you start “wasting” money at the cost of the future.

Most of the investors find themselves not saving any money and living paycheck to paycheck for the simple reason that they never develop the saving habit and eventually end up in the never-ending cycle of earn -> spend -> earn -> spend

You should check this excellent simple video by Brain Tracy on why you should save at least 10% of your salary if you are a beginner investor.

Some time back, I had written an article for beginner investors and how they should manage their financial life. Please go through it.

If a person sets up the auto investing at the start of the month, then at some level the habit of saving starts. If one is able to continue that for a few months, the overall expenses will get adjusted with the leftover money in the bank account. If you are a new investor, the primary reason to start your SIP or RD is not to save money, but to develop the habit of saving.

Benefit #4 – You reduce the risk of investments

If you do not spread your investments across months, then there are good chances that if the markets fall suddenly, its impact will be high on your wealth. In the same way, the upside potential is also high. But let’s focus on the risk part here.

If your investments are happening each month on a regular basis, then your investments are spread over all kind of markets like bull and bear market (assuming your investments are happening in mutual funds SIP)

So if you want to control the risk part, it’s a good idea to let your investments happen on a monthly basis and not a one-time basis. A good example of this is SIP in ELSS vs. One time investment in ELSS for 80C.

For example, consider two friends Ramesh and Dinesh

Case 1 : Ramesh invests Rs 1.5 lacs in one go for tax saving during the month of Feb, but the markets in next one year go up and down and eventually go down by 10% . In this case, the investment done will be having high risk, because all money was invested in one go (which also means that potential returns can also be high if markets do well) and all the ups and downs impact will be on the total money.

Case 2 : However, Dinesh does a SIP of Rs 12,500 per month in ELSS, and in 12 months he invests total of Rs 1.5 lacs. In this approach, the investments are spread over 12 different months and risk (and returns) will be more controlled. If markets go down in the first few months, then it’s only for the amount invested before that event.

Benefit #5 – Guilt-free Spending

This is one benefit that is often not appreciated enough.

When you save your money at the start of the month, then the rest of the money is available for your expenses. Now you can spend it freely, without any guilt.

Most of the people who do not save enough or save at the end of the month, keep worrying and thinking while spending their money. They keep feeling “Bahut Kharcha ho Gaya is Baar” while going for outings or movies etc. This is because they have not allocated money for the future.

So you should start your auto investing (SIP is one of the best way of doing that) and once you have done that, I suggest you adopt the envelope style of expenses where you create few envelopes for each expenses category and put the cash in the envelope and use only that till the end of the month.

However once you setup your automatic investments at the start of the month, you then just have one agenda – “Spend rest of the money” guilt-free.

Are you starting your investments in Auto mode Now?

So what are you waiting for?

If you have not yet started your investments in auto debit mode, you should immediately start your investments. You can either start your SIP with our team or reach out to your trusted advisor who can guide you on this.

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We all make various kinds of financial mistakes, and then regret it later.

Don’t we?

I wanted to find out, what kind of regrets are widespread among Indians, so I ran a survey for many weeks & got an amazing 11,324 participants for the survey. The survey had many questions and various insights can be drawn out of the data, but today – I am just going to share one of those insights with you (more to come later in other articles)

Most common regrets investors have

When I created the survey, I was able to think of 8 mistakes & asked the participants to chose among those only (It was possible to chose more than one mistake) and here were the results

Now we will look at each of these regrets and discuss them in detail

Regret #1 – Not working seriously on increasing the income

When I listed down 8 mistakes as the part of the survey, I was quite excited to know which mistake will be on the top and after I looked at these 11,324 results, it was clear that the biggest regret was – “Not working on increasing the income”

Think about it for some time…

The “income” one earns is one of the tops most important things in financial life. You will be able to build wealth over time, only if you invest the money.

The investment can only happen if you are saving a decent amount of money after your expenses happen. Which becomes possible only if you are earning good enough income.

So if one has low income, then it’s not a great situation to be in, especially in today’s times. Because then your expenses itself will eat up all your income and you will not be left with enough surplus each month. You will not be able to save enough for your financial goals, for buying a house, and other necessities in life. If this continues for many years, you will be stressed most of the time thinking about the future and handling the short term demands which life keep throwing at you.

As per the Pew Research Center study, India primarily has poor or low-income families and even by world standard, we are not doing well. Not everyone in India works in Big IT parks or sophisticated jobs like you and me.

(Image source)

When most of people start earning money, they go into the comfort zone of life and don’t take enough measures to increase their income. Whatever pay-raise they get from their employer is taken silently for many many years assuming that they are getting what they deserve, only to realize years later, that they are underpaid.

As an investor, you should spend a lot of quality time on building your skills, and finding the right environment which values you and pays you good enough. You should find out various ways through which you can increase your income.

This article gives you some background on how to change your habits and mindset around money, in case you want to do something about it.

Regret #2 – Not making any investments till date

Even after many years of earning money, a lot of investors still don’t make any real investments. By real investments, I mean a considerable wealth. I am not talking about a few small Recurring deposits you did or your LIC investments which you did for tax saving. No!

Answer this …

“How much of your earnings to date, have you saved?”

There are many people who have been working for the last 10 yrs, but their savings/investments are just equal to their yearly income!.

1 in 3 investors wait for 5 yrs before they make the first investment

Here is a survey I did last year where I asked investors how late they were for making their investments. 29% of people said that they waited for 5 yrs before making their first investment and 8% of people had not invested even after working for 10 yrs.

If you add both the numbers, seems like 1 out of every 3 investor wait for at least 5 yrs before making any investment. That’s a scary number.

Here are the topmost reasons why people do not make investments for many years

• They don’t save enough after their expenses
• The amount of saving they do is very small and they feel it’s not worth saving that much
• They are spendthrifts by heart and just spend the money
• They just keep thinking – “I will invest once I have enough money”
• They tried saving some money, but eventually used it for some purpose
• They faced a bad experience and then decides to not invest
• They just avoid investing because they feel it’s complicated and confusing

If you are a young investor and waiting for the right time to invest, trust me – it’s never going to come!

Start with whatever small amount you can, so that you at least teach yourself the habit of investing, see how it feels to see a few thousand in your bank account which was saved by you. That feeling will be great and the chances of that habit of saving getting stronger are high.

Regret #3 – Not focusing on a career or choosing the wrong career

Your career is a very important part of your life.

Your career will decide how much you will earn, which in turn will decide the quality of your financial life to a great extent. Your career will decide how will be your mood for 8-10 hours each day. It will decide your stress level and your health too.

Your career is like the center of your life if I am correct.

If you don’t love what you do to earn money, there will be issues in your life and many things will get affected due to that. I want you to read a few answers from quora where people have shared their views on the career mistakes people make.

I have often seen that a bad financial life is a result of a bad career or wrong career. Many a time, people get into a job which they don’t hate, but then they never work on making themselves skilled enough to reach the top positions.

Take an example of a software engineer, there are many people who don’t hate their job, but then they are stuck with a profile or skills which they have not upgraded and hence they are not fully satisfied with themselves.

Don’t be that person!

If I have to share from my personal life, My first and only job was at Yahoo as a systems engineer. I was recruited from the campus. I was an algorithm and problem-solving guy who was chosen for the server related work which involved everything I never enjoyed, nor I was confident enough.

Within a week of joining the job, I realized that I am in a mess.

I knew that I am stuck into something which I am going to hate like anything for the next coming years. I just survived for many years and side by side worked on this website and with a few thousand in my bank account, I told my manager that I am quitting my job.

Current Situation

I changed my career path totally. I am now satisfied with what I do for a living and to earn money. I have increased my skill levels in a totally new domain.

I know it’s not easy, but see what all actions you can do and improve things on your side.

Regret #4 – Spent too much mindlessly without thinking about future

This regret is somewhere closely related to #2 point – “Not investing anything till date”

After the first paycheck comes to one’s bank account, it’s a very special phase of life. Most of the people get into the spending spree. We all have done that and there is nothing wrong with it. After all, for so many years you wait for that day when you will have control over money and take decisions of spending without any restrictions from parents.

After all, there are so many unfulfilled wishes and desires we all have.

However, there is one problem

Many investors never stop their spending spree and continue it for many years, without looking back on how it’s affecting their financial life.

They are busy enjoying life, buying expensive gadgets, taking vacations they can’t afford, and eventually get into debt trap and keep paying a big portion of their income into EMI’s

No, we are not talking about spending money on needs and enjoyment. We are talking about people who go overboard and cross their limits. We are talking about that person, who earns Rs 5 lacs a year, but lives the lifestyle of a person who earns Rs 10 lacs/year.

• If their financial status allows them to own a Maruti Wagon R, they buy Honda City.
• If they can afford eating out twice a month, they do it twice a week
• If they can afford to call 50 people for a family function, they call 500 so that they “look good”

And this continues for years and years … and once they get married or once they have kids, then they start wondering about the future.

That’s when they wake up and realize that they have messed up.

If you want to do mindless spending and never restrict yourself, then better earn like hell.

Make sure you take your income to a level, where “how much you spend?” does not matter. But most of the people earn a fixed income whose growth is going to be linear over time. Better control your spending beyond a level if you can’t earn enough.

Regret #5 – Lost a lot of money in bad financial product

Investors trust close relatives and friends while investing their hard-earned money and invest money based on relations, hearsay or recommendations and don’t think enough before writing that cheque.

So the family uncle becomes the insurance advisor and the tax-saving expert, and the friend in the next cubicle is your financial advisor at times.

In the name of the tax-saving rush, investors commit themselves for years of premium payment in a useless product which is packaged very well and then many years later, they realize that they invested in a dud product.

Check the poll results below were 920 investors have shared why they bought a financial product which they realized is a wrong one for them. People buy it because they trust others easily, or its pressure from family/relatives at times.

The worst thing is the time lost and not exactly the money only.

If you invested Rs 50,000 each year for 10 yrs and finally realized that you only have Rs 4 lacs back out of 5 lacs paid, Your loss is not just 1 lac, its 5-6 lacs, because your 5 lacs could have become 10-12 lacs over these 10 yrs, think about the opportunity lost too.

Regret #6 – Trusted others too much and lost a lot of money

This is just a subpart of the point we just discussed.

A lot of people have lost a lot of money because they trusted someone. It can be a friend/relative or completely unknown person. There are various scams that happen in our country and worldwide. There are chit fund scams and get quick rich kinds of scams and people put their hard-earned money without thinking much.

Here is a recent case where a woman trusted a person and transferred 11 lacs to their account and later realized that she has been duped.

I am not recommending that you become paranoid about your money security and just never trust anyone, but when you are investing your money, make sure you do the background check of the person you are dealing with, do your homework and understand what you are getting into.

Regret #7 – Didn’t buy a house even when it was possible to buy

13% of people from 11,324 people who took the survey said that they regret not buying the house when it was possible for them. I am not sure what percentage of these people don’t have a house at the moment, but I am speculating that many people had the money to commit for down payment and take a loan, but they didn’t do it and finally prices went up and they could not buy the house later due to rise in prices.

(Check this interesting article discussing software engineers and house ownership pattern)

My suggestion is that if one has the potential to make a down payment for the house and can afford to pay the EMI, then one can buy the house for consumption purposes (if not for investment purposes). Once you buy the house, a big pending task of life seems to be completed. But then this is a personal choice.

Regret #8 – Took too much loan in my life

Only 11% of people chose said that they regret taking too much loan.

It does not mean that people are not taking a lot of loans, just that they are ok with it or deal with it properly and don’t consider it as an issue. A lot of people prepay their loans before the original tenure.

My recommendation is to not take unnecessary loans for consumption purposes like vacations, alliances etc. The only two loans which to me make sense are Education loan and Home loan. At times car loan is fine, but then no other loans. Personal loans should only and only be taken in case of emergency and never otherwise.

What is your financial regret?

I would like to know from you what has been your biggest financial regret? Have you committed some mistake which you repented for years? If you had avoided that mistake, you would have a different financial life today?

Please share it in the comments section!

Today I am going to talk about some mistakes which young investors make in their early life. Many experienced investors would be able to relate to it, because often we make these mistakes because there was no one to guide us when we started our journey of wealth creation.

“Young investor” here means any person who has just started their careers. Most of them would be below 30 yrs of age. I will share 7 mistakes in this article. You can consider these 7 points as the words of wisdom from experienced investors.

Mistake #1 – Not Focusing on increasing the income

Nobody became rich by only controlling their expenses!

“Low income” is probably #1 reason, why most of investors are unhappy in their financial lives. Low income means low/no savings, restricted life style and constant worry about future. A small financial mistake can turn very costly if one has small income.

Imagine a guy living in Mumbai & earning just Rs 35,000 a month (or even Rs 80,000 now a days) and have to support a family of 4 people? Can you imagine how “tight” his situation is?

For most of the people, salary increment “happens” naturally and never worked on consciously. Most of the people take whatever comes their way for many years, only to realize that rather they should have come out of their comfort zone and worked “actively” on increasing their income.

They could have relocated to a new place with better opportunities, changes their jobs, asked for a salary raise, or could have worked on an alternative income, but most of the people don’t do that. They just go with the flow thinking – “I will get, what I deserve”

In one of the survey’s I have done recently, I asked participants to choose the top most mistake of their financial life. I gave them 8 different options to choose from and 39% of the people chose – “Never worked on increasing my income seriously”.

As a young investor, the best investment you can make it not some mutual fund, or a policy, but you yourself. Invest in yourself and develop skills which makes you “valuable”. Make yourself so employable that people run after you.

Remember, if you earn a big income, you can still make a lot of mistakes, spend like hell and choose not to control your expenses.

Mistake #2 – Getting into Debt Trap Early in Life

Don’t get me wrong!

I am not against taking debt.

But, a large number of young kids who start their career have bad relationship with money and credit facilities.

They start using credit cards as if it’s a money toy. It all starts with a small outstanding credit card bill, and soon it starts rolling up every month and soon they find themselves paying minimum due amount and finally when things go out of control, they take a personal loan to close off the loan or convert the outstanding amount to EMI’s and starts how their debt trap starts!

Then follows car loan, home loan, another personal loan, another credit card and this way a person gets into deep debt cycle. I am sure if you look back, you will realize that the debt trap started very small.

Let me share some data with you on this. As per this report, personal loans as % of loans stands around 18% as in the year 2016 (Out of every 100 loans, 18 are personal loan).

As a young investor, you can still do mindless spending, but that should happen with cash money and not credit. Because getting into debt is easy, but coming out of it is not that simple. So as a young investor try to take debt only if you don’t have any choice. As far as possible, take responsible credit which helps you in life (education loan or home loan).

Mistake #3 – Not taking risks in start of your career

I am not saying that everyone should go and start taking some risk without planning. All I am trying to convey is that its more easy to take risk when you start your career, rather than middle of your career or when you turn 40, because in your early days you have less responsibility and enough time to fix your mistakes if any.

Think of these options below!

• Want to move out of your industry and try something else?
• Want to try a start up?
• Want to try that online business idea?
• Want to change your career path because you don’t feel you belong to current job?
• Want to ask for a salary hike, but too afraid to lose the job

The above 5 things can be tried at any point of career, but practically you have more appetite to try out these things in the start of your life, when you have less responsibilities and enough time in hand to correct the mistake if any.

If you are still confused about this, you should listen to this YouTube video about best practices in Career Risk-Taking. It will help you

Once you have already spent significant number of years in your job, you will get married, have kids, get into the cycle of “life” and it will become very difficult to come out of the comfort zone. I get many mails which starts with “Had I tried it 10 yrs back … ” and I can see how people feel so stuck into their jobs and now they can’t take much risk at this point of life.

Mistake #4 – Buying policies from your relatives/friends

There are millions of investors in India, who have lost a lot of money in bad products which were sold to them by someone close to them. It was often an uncle, aunty, father’s friend, distant relatives or even your siblings at times.

A lot of products are bought in India based on trust and goodwill. Often relatives pressurize you to take a policy.

This is particularly true for Endowments policies, ULIP’s and other insurance products. You will often find someone in your close circle who is an agent and your parents trust them like anything and force you to buy a policy from them.

Years later you realize that you have burnt your fingers and can’t express your dissatisfaction openly. So what is the way out? Either research on things on your own or directly buy form the companies or if you need external help, better hire an advisor or an external agent, but not a relative

Mistake #5 – Investing in a product you don’t understand yourself

On an average, 90% of the investors can’t explain what exactly they have bought. I was once talking to an investor in our workshops (the upcoming one is in Pune on 22nd May, 2016) and the guy said he has few policies. When I asked how many? He had no idea

When I asked what are the names of the policy, he didn’t even know that.

He said that he had bought them few year back for tax saving and does not exactly know what they are !
The problem is that investing in products, which you don’t understand blocks your financial energy. Your money is stuck in a rotten product and takes away a lot of time.

So if you are buying a financial product, please learn how it works and how it’s going to benefit you at the end of the day . Find out everything about return, risk, liquidity and taxation. If possible, better know which financial goal it’s going to fund.

Mistake #6 – Not saving early in life

After spending many years in your job, you will realize as an investor that “I will save when I will have more money” is an illusion.

When you start earning money, your income is less and you are not able to save money at all because you are hardly left with anything at the end of the month.

However note that this is going to be true always. While your income will rise in future, so will your expenses. You will get married, have kids, your lifestyle will improve. You will get a car, buy a house and what not. You will enough feel that you have enough to save.

The graph for expenses is set to rise and this feeling of “I will save in future, when I earn more money” will be intact. This is the reason a lot of investor never save enough money which they deserve.

The graph below shows you if a person starts investing Rs 10,000 a month, they can accumulate around 2.9 crores in 30 yrs. However if they delay it for 5 yrs, and then start the same thing. They will accumulate only 1.6 crore by the same time. That’s a big difference because of the delay.

As a young investor, you need to understand that habit of “saving money” is more important than how much do you save. If you can’t save anything, start with Rs 100 per month.

I know it sounds like a joke. But once you do it for 5-6 months, you at east know that you can save Rs 100.

Then upgrade the number!

Upgrade to Rs 500 or Rs 1000 a month. Continue for another 6 month.

Soon, you will realize that you have reached Rs 5,000 or Rs 10,000 because you are just increasing the number, the “habit” was already in background.

Mistake #7 – They neglect their health

If you do not have good health, it will not matter how much money you have earned, because you won’t be able to enjoy that money at all. It does not make sense to lie down on a bed made of gold in your retirement.

While earning money is important and required, make sure you also pay attention to your physical and mental health. These days, the jobs are too demanding and there are many money matters which will take the peace out of your life. You might get lost in the rat race and forget that you have a body to take care for years.

Only years later you will realize that it would have been better to earn a bit less and have a healthy body, rather than having bad health with money.

The quote from Dalai Lama is worth reading

Learn from others mistake

At this point of time, internet is flooded with the mistakes other investors have done. It’s a wise thing to learn from those mistakes and not repeat them.

A good and healthy start of one’s financial life helps a lot and if you are a starter, I strongly suggest you take a note of the points above and implement them.

Please share your views on the points above. Were they helpful to you as a new investor?

Have you ever bought the wrong financial product? Or it was mis-sold to you out of pressure from family/relative? Or because you trusted the seller too much? If not these reasons, maybe you wanted to do last minute tax saving and you jumped into buying that policy and gave yourself a life sentence of paying premiums which will not help you much in long run?

We are today going to discuss all sort of issues which arise when you get into a wrong financial product and why you should avoid it at any cost.

Background

Let me first give you some background on how I got started with this article. Here is what happened.

A few days back, I was once watching a TV show and there was a story of a woman who married a guy out of the pressure of family who wanted to get married as such as possible. She fell for the short term tricks and didn’t pay much attention to those points which matter in the long term.

Soon after the marriage, she started realizing that she made the mistake. It’s not what she wanted in life and its not a match which can sustain. Life was a mess. She was stuck in this relationship.

Coming out of it was not easy. She was in depression and all the time was going into regretting the decision. Almost 5 yrs had passed and by this time, a lot of her energy and time had got wasted.

Finally, she came out of that bad marriage. Often she wondered why she took such an impulsive decision? What if she had never got into that bad relationship? How would have her life shaped up?

Investors do the same thing with financial products

A lot of investors buy unsuitable or wrong financial products in their financial lives and it drains their money and valuable energy. It gives them unnecessary tension, which could have been avoided if they were a little more prudent in their financial life. Below are the top 4 reasons why most of the people have bad financial products in their life. I surveyed 920 people, the top most reason why because they were careless themselves and bought things without much thought. Where pressure from family/friends was not the major reason.

The careless attitude costs them too much trouble. I have worked with more than a thousand investor now, and I can tell you most of the good financial lives which we see are not because of making good decisions, but by avoiding bad decisions. Most of the people who have high net worth or powerful financial lives are those who have not wasted their valuable time and money in wrong financial products and concentrated on simple things.

One bad move can nullify 2-3 good decisions.

Today I want to talk about 4 core problems that arise out of buying the wrong financial product. Let’s look at them one by one.

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Problem #1 Waste of money	Problem #2 You feel “stuck” and waste your time and energy
Problem #3 The opportunity Cost	Problem #4 You lose trust and everyone looks like a “cheater”

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1. Waste of Money

Nothing hurts investors more than losing their hard earned money. When you buy a wrong financial product, most of the times, you lose money or do not get the returns your hard earned money deserves. A few years back ULIP’s were one of the most mis-sold financial products. Millions of investors have lost their hard-earned money in these products. The charges in the first year were huge at that time which ate away all the returns one got. On top of it, the returns of the ULIP were linked to the stock market and most of the investors never knew this.

Because of this, a lot of investors lost a big chunk of their money in these products.

Below is a snapshot of one of our readers who bought a ULIP in 2008, and he paid a total of Rs 48,000 in the ULIP, however when he checked his statement after a year, his fund worth was just close to Rs 27,000.

The value of the fund had come down due to market movements and commissions structure, but the main point is that the investor never expected it. He didn’t know that it could happen because, at the time of selling, there was no communication of the risk part. This is what happens when one buys a financial product without understanding it.

Then there are other kinds of products like endowment insurance policies which does not pay you back your full money if you surrender them in between or very early. Its the product design. If you pay Rs 50,000 per year premium, then in 4 yrs you must have paid Rs 2 lacs in total. Do you know much would you get back, if you wanted to close the policy and take your money back? On average it would be just 40%-45 %, which means only Rs 1 lac you will get back.

Forget financial products, some time back I bought a sim card which was available on purchase of an internet connection and there were some attractive benefits associated. I fell for it and bought it without giving much thought. I spend a good amount of time and energy behind it, paid bills without using it and finally ran around to close the connection. I could have avoided a lot of pain, had I just ignored it. The same is true for various credit cards, unwanted memberships, etc.

2. You feel “stuck” and waste your time and energy

Forget money, what about the time and energy you waste? Once you are stuck with the wrong financial product, you will keep thinking about it. You will keep regretting your decision. The financial product will be part of your life and you will often wonder why you invested in it?

Most of the people anyways take a lot of time to take financial decisions and just imagine what happens if one of those decisions is wrong or bad for you? You will keep cursing the agent, your financial planner, yourself, the system, SEBI, IRDA and every other person (even yourself).

You feel STUCK …

Nothing is more frustrating than feeling stuck and not being able to do anything fruitful. There are millions of investors who are stuck with their endowment policies, ULIP’s, bad credit cards, wrong advisors, other products. They want to get rid of it, but they DON’T.

Also, the world is cruel, you as investors are taken for granted. See how one of the readers, when tried to surrender his LIC policy, was treated.

Hello – I approached the branch manager on cancellation – it’s not even 7 days – he is asking me to get the agent to the branch! is this correct ? I have a question : If I want to surrender the policy or retrieve the maturity amount , is the agent required , this is weird stuff , If this is not true, please help me how this can be escalated and resolved .

Over-analysis leads to more delay

Investors also over analyze what they need to do once they realize that they bought something bad? How to minimize their losses and how to come out clean. But in that process more and more time passes and the situation gets messier compared to the past. Most of the people keep delaying their policy surrendering for years and the damage keeps compounding.

It’s like you bought a bad stock and you didn’t sell it off when you had a 10% loss. You wanted to get out of it at the right time and then it will send down by another 10% and then another 20% and finally out of frustration you sell it at 50% loss wondering why you didn’t take 10% loss itself at the first place.

In the same way, most of the investors keep thinking about the loss they are going to make if they get out of the bad financial product and keep postponing their decision. Here is one comment from our blog where an investor shares his state of mind. You can see that he feels so stuck. This is a very common problem

Our lives are very busy these days and if one pending item gets added to our list, it takes months and years to complete it, even if it’s just a few hours of work!.

So the big problem which happens when you buy a wrong financial product is that you waste your valuable energy trying to fix the issue. That precious time should have gone into earning more money and managing it well.

3. The opportunity Cost

Opportunity cost here means what is the other thing an investor could have done had he not got into a bad financial product. This is a very important thing to understand for financial success. Imagine a bad decision, where you invest Rs 5 lacs and after 2 yrs, your money worth is just Rs 4 lacs. You are in a loss of Rs 1 lac ?

NO, it’s not just Rs 1 lac.

Why?

Because you could have taken the right decision and could have made a profit which you lost in addition to the real loss. In that same example I gave above, you could have invested Rs 5 lacs in such a way that it would have become 6 lacs in 2 yrs. So your opportunity cost is Rs 1 lacs which you didn’t make here. Instead, you are sitting on a loss of Rs 1 lac.

Another example is of a young investor who wants to create a big corpus in the long term, but he/she is maximizing the PPF by investing Rs 1.5 lacs per year in that.

After 15 yrs, they will get a near inflation return only. I consider even that as a bad decision looking at the goal of wealth creation. The same 1.5 lacs can be invested in an equity product and a better inflation-adjusted return can be earned. The final wealth different in case of equity vs. PPF will be quite a big amount. The difference between 8.5% return compared to a 12% return is huge.

4. You lose trust and everyone looks like a “cheater”

Do you know how does it feel when you take some financial decision by trusting someone and you lose money? The tweet below was done by Kalpen Parekh, CEO Of IDFC Mutual funds.

When investors hear us say, it’s cheap so buy more, this is what Dharmendra will say! pic.twitter.com/UIHLdhpzAC

— Kalpen Parekh (@KalpenParekh) February 27, 2016

Money is a very private matter and most of people are very very attached to it. When an investor gets a bad experience once, they carry it with them for a very long term. Every other person starts looking like a cheater to them. Everyone seems to be behind their money and it’s tough to trust others.

It’s a very natural reaction, but the problem is that it also damages the investor’s chances to get into a good association too. There are many investors who contact us for their financial planning and many of those who have faced bad experiences in the past never move ahead because it’s difficult for them to trust someone now.

Imagine a guy who has had a bad experience with ULIP, someone who has lost his money due to market movements, will find it very tough to start his SIP’s in mutual funds for his long term wealth creation. This is a big loss for himself based on his past experience.

I know few investors who have vouched to never buy any other financial product other than a fixed deposit because they felt cheated in the past.

So what is the point I am making? If you take the wrong financial product, then it affects the way you think about financial products and advisors in the future.

How to buy financial products?

I am not going into detail here, but one thing is clear. You have to take out the emotions out of it. No greed, no fear, no pressure, no over trust on others. Make sure you understand what you are buying, why you are buying, for which goal are you buying, what are the risk factors, etc.

If you spend just 1 hour before you get into a financial product, I think 95% of the investor’s woes will be solved.

What do you feel about this article? Do you have more points to add?