Make Your Money Work for You: The 5 Step Guide (Step 5)

This is the last post in our five-part series on beginner investing, where we will talk about investment decisions that might make you #facepalm at yourself. If you’ve missed any of the previous posts, click on the links below:
Step 1 where we answer the question ‘why invest?’
Step 2 discusses the best time to start investing.
Step 3 tackles the length of time to remain invested.
Step 4 talks about how to get started.

If you’ve made it this far, you’re already equipped with the basics to help you make good investment decisions. We’ve been talking about what to do, and now it’s time to consider what NOT to do. The investment world has its own share of horror stories, often where people lose money drastically instead of gaining it. Rather than putting you off the idea of making investments because they’re ‘risky’, these should be treated as cautionary tales that teach you what pitfalls to avoid. Here are some examples of investment decisions you might regret:

INVESTING ALL OF YOUR SAVINGS IN GOLD

Mrs. Bahuguna uses all her savings to buy gold, just as her mother and grandmother did before her. While the price of gold rose after she first started buying it, there have been a few lows over the last 5 years. 10 grams of standard gold cost ₹29,600 in 2013, dropped to ₹26,343.5 in 2015 and reached ₹29,667.5 in 2017. Overall, her investment has barely grown at all.

REWARDING YOURSELF TOO EARLY

When her portfolio crosses ₹10 lakh, Meeta decides to reward herself with designer leather accessories worth ₹4 lakh. She regrets this decision a few months later, while calculating the potential gains from leaving that sum untouched even a few more years. While she still has a sizeable investment, impatience cost her the edge that compounding returns provide over the long term.

‘INVESTING’ IN INSURANCE

An agent convinces Mrs. Arora that an insurance policy is a great investment. With a 12-year term and annual premiums of ₹48,000, she will get ₹5.5 lakhs on maturity. She later discovers that mutual funds would have yielded over ₹9 lakh over the same term. Mrs. Arora has no choice but to wait till she reaches the policy’s minimum surrender value, to avoid losing 70% of her money with an early surrender.

PLAYING IT ‘SAFE’

Ruchi has not made any investments other than putting a small percentage of her salary into a PPF account. She assumes this will be enough to keep her comfortable after retirement. But, Ruchi hasn’t accounted for the fact that PPF rates of return have been decreasing over the years. With inflation on the rise, her retirement savings will barely cover basic expenses for 5-7 years. Savings accounts, fixed deposits, gold, PPF and other ‘safe’ investments are not powerful enough to beat rising costs of living today. Treating insurance as an investment or pulling money out of your portfolio for non-critical expenses will also make you ‘facepalm’ someday down the line. Be smarter with where you plant your money, so it grows at a pace that’s actually effective!