Indians love to save. We have one of the highest savings rates in the world. At a household level, we save about 24% of our incomes. However, the reality is that our savings are never enough to meet our aspirations.
There are few common mistakes that Indians make:
1. Parking their money in fixed deposits and insurance
As a country we have more than ₹60 lakh crores in fixed deposits and insurance instruments like ULIPs/endowment plans (Source: RBI data). They typically return only 4–5.5% post tax in your hand depending on your tax slab. They do not beat inflation in most years and are not great for building wealth.
2. Letting money accumulate in a savings account
Savings accounts in India hold about ₹20–25 lakh crores. You get 2.5–3% returns post taxes. Even if you want to take a conservative approach, it’s better to park your short-term requirements in liquid/ultra-short term funds. You can have a month’s expenses in your savings account and use your credit card/e-wallet for regular expenses.
3. Delaying structured investing
Most people start thinking about structured investing around the age of 40, either because of their own/family’s health issues or because of the escalating education costs of their children. Every year that you delay is very expensive. We did an analysis of the monthly investment required if you are saving for your child’s education in the US. The cost of delay is nothing short of shocking.
Future expense is computed on the basis of costs in an average university campus, an annual increase in fees and modeled dollar inflation (Internal research: Upwardly.in)
4. Investing in real estate
In this day and age, real estate has very low utility as an investment option. It is more of a consumption decision. In most cities in the country, the cost of renting is significantly lower than the cost of EMI (adjusted for any appreciation). As an investment instrument, you are looking at 4–6% tax adjusted return, including rentals (if any).
5. Accumulating gold
For generations Indians have bought gold because of socio-cultural as well as investment reasons. Apart from families, businesses and bullion traders have also bought gold as a safe instrument to park their money. However, gold is not the safe haven that it is made out to be. Its inflation adjusted returns have been fairly volatile — at times exhibiting even higher volatility than stock markets.
6. Being risk averse
The biggest risk you take is not taking a risk at all. India is the growth engine of the world. It is an economy with a lot of return potential from equity markets. This is the only way to beat inflation in the long run and creating real wealth.
You should pick up a good investing platform today and start sooner rather than later. There are many online platforms available today where you can start saving/investing for your life’s financial goals. We love to procrastinate but this is where Kabir Das’s wisdom comes in real handy — Kaal kare so aaj kar!
Then we have the curious variety of investors who have been investing for a while. This is the august minority of Indians who invest in equity markets. They make the following mistakes over and over again!
7. Trying to time the equity market
No one absolutely no one knows when to time the market. This is true for professional fund managers too. You should not attempt it either. Give your money to a trained fund manager with a track record. Pick the top funds and relax. Gambling with your financial future is not worth it.
8. Falling for stock tips
Every bull cycle has created lots of stories of people losing a lot of money. We have seen this happen in the 90s, 2000s and we will see it again. But people fall for it every single time. Such is the lure of the fast buck. Please avoid this trap! I think being disciplined and not succumbing to greed is very important.
This article was first published on Huffington Post