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| Capitalstars Investment Advisor |
Planning your finances can be akin to negotiating a minefield, of money myths. Over the years, we have systematically busted one myth at a time to make the life of you, the investor, easier. However, the rot of misinformation runs so deep that even some personal finance professionals spout fallacies without realizing how wrong they are.
Myth 1: Pay long-duration loans first
A common trait among many finance professionals is to recommend paying off of long duration loans quickly to save on interest costs. While on the face of it the logic appears sound, the folly lies in not considering the time value of money. What the financial advisers are doing is equating the interest saved now with interest saved after say a decade.
Myth 2: Risk is not for the middle class
This myth warns the middle class to avoid risk at all costs. However, shunning risk now can have serious repercussions in the future. This is because this income group has limited resources and will not be able to meet goals by relying on low risk and low yielding debt products alone. In other words, investors from this group must park a part of their portfolio in growth assets like equities that can generate higher returns. “People with limited resources can’t afford to ignore equity. Else, inflation will eat into their corpus. The only question is how much this equity allocation should be,” says
Myth 3: In the long term, sips are risk-free
While all finance professionals say SIPs average out investments and thereby reduce risk, some go overboard and try to project SIPs as the weapon to eliminate risk altogether. “SIPs will never able to eliminate risk because it is just a tool and not a product,” says Amol Joshi, Founder, PlanRupee Investment Services. Though SIPs can be done for any asset class like equity, debt, gold, etc., most investors use it for equity funds. “Equity returns will never look linear, whether the investment is done through SIPs or one time. A casual look at the last 20-year returns will show a few good, bad and average years,” says Alam.
Myth 4: Retirement planning is all about money
This myth grew as discussions about retirement planning centred around creating the retirement corpus. While most people underestimate the longevity risk or the risk of surviving long years and exhausting the retirement corpus, creating an adequate corpus that will last till the end is the corner stone of retirement planning. However, retirement planning should also take care of several other issues.
Myth 5: The family budget needs to be detailed
We tend to avoid seemingly complicated tasks and budgeting is one of them. The myth about must having a detailed budget in place needs to go. Not creating a budget because you can’t make a detailed one is foolish. There is nothing to stop you from creating a family budget with broad guidelines. “Budgeting doesn’t mean that you have to write down everything. Treat budgeting as a broad framework and split the outflows into three buckets—expenses, repayments and savings,” says Joshi. What is there in each bucket will vary depending on life stages and income levels. For example, expenses will be less than 1/3 for families with very high incomes. Similarly, the repayment buckets will be empty for people without any loans.
Myth 6: Straying from the budget will upset financial plans
If you repeatedly fail to stick to your budget, you will impact your long-term goals. However, budgets are broad guidelines and overshooting every few months is normal. If there is a budget breach, find out from which bucket you have spent excess from. For example, meeting your sudden urge to buy a smartphone by giving up on the annual travel plan is fine. However, there would be a problem if you bought the phone by breaking into investments for critical goals like your kid’s education or your retirement planning.
Myth 7: The financial adviser will take care of it all
Most investors assume that once they hire an adviser, their financial planning related work is over. What investors should understand is that planning is just the starting point and not the end. “We take clients’ input in everything and explain the possible scenarios to them. After that, it is their decision,” says Sadagopan. It is also not safe on the part of investors to blindly trust advisers. Investors should always remember the ‘caveat emptor’ rule. “Investors handing over the logistic part to the adviser is fine, but they need to keep the decision-making part with them,” says Shah.
Please note that appointing someone as your financial adviser itself is a big decision and you have to do proper due diligence. Even after that, investors need to drive the engagement with the adviser and keep questioning them. As per the Sebi RIA rules, active involvement from the client is compulsory.