All of us have heard of the seven deadly sins. But do you know the sins of financial planning? The myths that have plagued our systems for so long, that we do not think twice about blindly following them. Here are the five financial planning myths that you should stay far away from:
SIPs a day can keep risks completely away
Let us burst the bubble for you. No financial instrument or tool can be completely devoid of risk. Systematic Investment Plans or SIPs are no exception to this rule.
It is true that SIP is a relatively better way to invest your money in mutual funds. This is because in the long run, SIPs average out the cost of investment and spread the risk across different market cycles. However, if the broader economic conditions are sluggish and markets go into an extended bear phase, even SIP investments may not yield reasonable returns.
Young = stay away from retirement planning
I am young! I am free! It is too early to fund my retirement tree.
If you find yourself nodding your head to this, you are falling prey to one of the worst financial planning myths. The truth is that you are never too young (or even too old) to start retirement planning. The sooner you start faster will you be able to build the required corpus.
Risk is BAD (Best Avoided and Dodged)
This financial myth is majorly sold to middle-class individuals. They are encouraged to stick with fixed-income or low risk instruments. But as a wise man once said, “If you’re not willing to risk the unusual, you will need to settle for the ordinary”. Only Low risk instruments will not be able to build a corpus or lead to wealth creation in the long run. Especially, if you have a fixed stream of income and limited resources, you can not completely ignore the high-risk instruments or equities. Remember, inflation also ends up eating a good chunk of your corpus!
The important thing to remember is to aim to maximise the overall returns of your portfolio within an accepted risk level. Diversifying investments across different asset classes – equity, fixed income etc. can be used to achieve this. It reduces dependency on a single type of investment.
Diversification – More the merrier
You must be wondering we just spoke about how diversification is good and a must-have. Then how is this point or myth valid?
Diversification is good. However, too much diversification can do more harm than good. Over diversification can dilute your returns as you do not have sufficient investment in any one scheme to generate reasonable yield. It also increases the chances of including more average s in your portfolio, rather than sticking with the better performing ones.
Go with the “hot” investments
Investing is not the fashion world – where everyone runs after the “hot” and “in” trends. In fact, in the world of investments, if you follow the herd, then you may only get what everyone else is getting. Nothing more!
If you wish to be a successful investor you need to think outside the box. Invest in inherently solid schemes which are in sync with your risk appetite, goals, and investment horizon, rather than blindly following the market trends or the so-called market hot picks.
These financial myths might seem harmless (even beneficial) on the surface but may have a huge detrimental effect on your financial goals in the long run. Following them may even take you to the financial ICU. So, maintain a safe distance from these detractors in your financial planning journey.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.