Investing blunders…
One of the stupidest things I have seen people do while creating wealth is interrupting the compounding. When a person invests in mutual funds, unit linked policies, national savings certificate, ppf, direct equity, …et al it is fairly obvious that they will break something.
Now if you suddenly need Rs. 2-3 lakhs from a portfolio of Rs. 75 lakhs – what do you do? Well you see which is the easiest to break. Simple.
Now for a person with such a small requirement, it may make a lot of sense to borrow from a bank – and repay the loan in 3-4 months. Or borrow against a life insurance policy (LIC gives you money @ 9% p.a.) and let LIC set it off against the accumulation of the plan at the time of policy maturity. Even better if the ppf account is more than 7 years old, you will be allowed to withdraw some amount of money from that account also.
However like all their investments, their withdrawal – Rs. 3 lakhs or Rs. 30 lakhs is withdrawn from the EASIEST place to withdraw. This is normally the mutual fund. While selling a mutual fund SIP the mutual fund adviser tells the customer – it is all right to withdraw, it is all right to skip one month, etc. Now these are FEATURES, but most customers do not understand what they are doing….and make a mess of their total portfolio.
So if you see why an ‘investor’ does not make as much money as the fund value..it is because most of them INTERRUPT compounding. This is one of the STUPIDEST things to do in a FAST compounding asset – especially if the asset allocation was scientifically done.
But it is common….reactions from ADVISORS welcome! I have too many customers reacting..want some adviser’s feedback please 🙂
Muthu
As an investor and an investment advisor, I agree with your observations. Despite my continuous education of clients, 10% fall in the category you mentioned. I’m happy about the other 90%. People do not have the same emotional discipline like they have in paying in housing loan EMI, when it comes to SIP. The discipline they have in paying a loan is not there in creating an asset.
As an advisor, I need to share some facts. Most of our SIPs have a tenure of 20 years, barest minimum is 10 years+. We keep monitoring a limited list of funds we recommend and advice course correction, only if it is really required. Our corpus and SIPs are increasing. There has not been even a single redemption in recent ‘market high’. Redemptions happen only when there is a need to rebalance ‘asset allocation’. We are choosy about clients.
Regarding Asoke’s comment in the previous article, I beg to differ. I’ve been trying my best to educate people through regional (Tamil) print and visual media. Recently when one channel asked me to do a live talk show on investing in Gold, I took a contrarian call and said why gold needs to form only a small part in anyone’s portfolio. I was ‘forgiven’ because the program elicited good response and TRP rating.
Likewise I’ve done live talk shows on ‘Jaya TV’ and is doing one today. In one of the shows a famous artist called and appreciated my views, when all I was doing was sharing some plain common sense and basics of personal finance. I do a decent job of sharing (cut and paste) the good fundas through my web portal.
When I wrote against combining insurance and investments, especially against ULIPs, I got abusive calls from number of insurance agents. Despite the limitations one have in media, I try my best to create awareness on basics of personal finance.
I’m the founder secretary of ‘T’nadu Financial Planners association’. What I write in my blog, share in media against stock trading, derivatives trading, expensive PMS products, combing insurance and investments, mutual fund NFOs and churning etc. earned the ire of majority of the association. I’ve quit the office bearer post and am now only an ordinary member.
Despite regulators ignorance of ground reality on one side and rampant misselling & misguidance on the other side, I’ve not last hope.
Asoke
subra
please revisit your edit policy. Muthu size is too much, please be brief
Sanjeev Bhatia CFP
I completely agree that people tend to break the thing which seems easiest, in most cases MF portfolio. I remember a recent study done for US MFs which indicated how far removed was INVESTOR’S RETURN as compared to FUND RETURNS. The reason was the same, that instead of remaining invested, people flitted in and out of MF schemes. I recently came across a study which mentioned how not remaining invested “JUST FOR 10 BEST DAYS” in the last 10 years reduced your Equity returns from 18% to 15.5%, a big difference of 2.5% CAGR.
Despite being allergic to ULIPs, I feel this is the only thing going in their favour. People tend to stop SIPs but somehow will pay their “Insurance” premiums since these are mentally more aligned to security needs.
The best way perhaps is to first have a goal, have an asset allocation plan pertaining to that goal and then stick to it through ups and downs.
@ MUTHU,
People will NOT stop their SIPs when markets are RISING. They will stop their SIPs when markets are falling. The reason partly can be attributed to Endowment Effect and Loss Aversion Theory as per behaioural science. The media creates a pitch (21000 by Diwali, 28000 by Dec) etc. and people continue to SIP on fear of losing out. A small downturn and the same media will set their targets lower, then all SIPs will stop. The same thing happened in 2004-2008 period. People were happy keeping up their SIP deposits till the market was RISING.Post Jan 2008 crash, however, most of the SIPs stopped, ironically at the time WHEN IT WAS THE TIME TO TAKE ADVANTAGE OF SIPs. SIP CAN NEVER GIVE YOU ADVANTAGE IN RISING MARKET AS COMPARED TO LUMP SUM INVESTMENT. But in case of volatility, SIP is the best thing to have since the BEST and the WORST days to invest are known only in hindsight.
BTW, pls don’t feel offended but after the first paragraph, all of your post was not relevant to the blog topic at all.
Mothu
Aiyoo, aarambichutaaruppa !
subra
Asoke, Mothu,
this is slightly edited, but the meaning has not been altered – made some tinkering dropping names, channel names, timing, etc.
A policy on editing is really difficult. If somebody says gold is good, I will carry it. If somebody says currency trading is good, I will carry it. Personally I may not like it, but world opinion is not what we are trying to create..are we?
aiyo…..means ‘Oh he goes again….’ sorry for assuming all readers know Tamil :). Completely wrong assumption I know….
Sanjeev Bhatia
Mothu,
Pls let us lesser mortals know what you mean by “Aiyoo, aarambichutaaruppa !”…LOL
Muthu
The name was dropped not to talk about ‘my show’s popularity’, but to indicate we can connect to the person who may not be aware of anything about personal finance. It is upto us to make it simple, jargon free.
I even dropped the name of ‘Mr.Alagappan’ on the other day to show how one man’s passion can make a difference to a few thousand.
My idea is to spread ‘financial literacy’, so my name variant ‘Mothu’ does not worry me. I think ‘Mothu’ is a phantom entity as to my limited knowledge, it is not a common name in any part of the country, especially Tamilnadu as he has used Tamil words.
Muthu
Thanks Mr.Subra for editing. The essence is intact.
Asoke, I’ll try my best to be as brief as possible, at the same time do not know whether it would meet your standards. As much as we talk about negativity, we also need to understand there are people who make positive contribution to the profession and financial literacy.
Dr Mohammed Ali Khan
Nowadays this blog is having an active comments section.. In large part due to Muthu and his detractors?
Deepak Shenoy
Subra, Few points:
1) Mutual funds have liquidity so that they can be broken easily. And some SHOULD be broken – like I have my emergency funds stored in a liquid fund. Why shouldn’t I break it in case of an emergency? Or I have stuff in short term funds for shorter term goals, and when those goals are needed I exit the short term mutual funds. I don’t even bother about FDs anymore because of their tax painfulness, but I do have a small linked FD just to ensure there is never a chance of a check bounce.
2. Exiting equity funds for cash flow – that is also justified if you can’t get money out of your other fixed income instruments, AND You can’t get a loan to cover the amount needed. Some money is NOT returnable in three-four months – for example if I need money for a car or house down payment, I’m not going to be able to return it in a few months. Instead of borrowing – and destroying one’s borrowing capacity by maxing the EMIs, and becoming unnecessarily interest rate sensitive, I would recommend getting out of what you can and to continue the SIPPing for future months.
3. If you borrow, you end up having a cash flow paying interest to the bank rather than to yourself, and this interest is not tax deductible, but your equity funds may (later) be taxable. This basically makes the interest you pay greater than the net interest you earn, which is not sensible.
4. Lastly, why do you save mate? Not for the sake of saving, which is what most people do. If people save for a certain goal or set of goals, they know how much they need to have at any given point. If they take off money from the corpus, they can be advised to top it up to get back to the goal direction. But if they take a loan, their net worth actually diminishes, but their investments will show they are on track – and they are not.
What you’re saying works for a certain mentality – oh, i will take from my savings and not put it back – but with an advisory mentality you can’t take that approach; you have to assume that the client will continue to take advice from you, and that you will advice him to top it back up.
Having said that, if you get a zero (or low) interest loan, take it! I just bought a laptop for 30K, and HDFC let me convert into three EMIs with zero interest. THe dealer wasn’t willing to give me a discounted PV of the cash flow (sorry), so I took the deal even though I had the 30K – that’s chota mota interest on my savings but it all adds up.
Anand
When some one needs money (and that too urgently), the mindset is such that you tend to withdraw from where it is easiest to do .. and yeah MF and Stocks are the easiest to withdraw..click of a button you get your money in T+2 days, and depending on your broker on the same day too for a small charge. Compare this against a loan against LIC or PF or PPF, lots of paperwork, running around to do and wait periods are longer too. The intention at the time of withdrawing is to put that money back into the fund at a later time but that never happens and yeah and you lose out on compounding.
I realized this sometime back. I now have overdraft facility against my 2 months salary (@18% for period/amount you use) and against fixed deposit (@ +2%). I use this for some unplanned urgent need and if I know that I can repay within a month or so.
meena s
I agree with Deepak. I also follow the same philosophy. My mutual fund portfolio is further divided into core portfolio and tactical portfolio. Core portfolio is for long term goals and they are not touched. Tactical portfolio is for short-term goals and I book profits from these periodically for meeting certain expenses. This is better than going for personal loans.
subra
i also agree with Deepak :). When I said mutual fund and SIP I meant EQUITY funds. A liquid fund is meant to be broken for emergencies or other wise when you require funds, so that point conceded.
Also each decision when analysed AFTER a period of time can look brilliant or foolish. For e.g. if you wanted money in Jan 2008 and had removed from your equity fund you would have looked smart, however when the index was 9k removing would have looked foolish.
Simple rule is if you need small amounts touch your liquid fund, then your life insurance policy, then other debt investments like ppf, nsc, etc., then equity funds.
Breaking an equity fund just because it is easier to break vis-a-vis a nsc or taking a loan against a lic policy is what i was trying to say is wrong….
Asoke
first of all i really think Muthu’s comments are more about himself than about the topic. too many ‘I’s in his posts. How does it matter that he is a president of some association or the other..that he came on tv…irrelevant to the post, not sure what others think…
Investing
Hey nice post!!
I too agree to your point that while investing many of them may not get success due to the blunders they make while investing.But an authentic source can lead to the path of success.