Yesterday my friend Rajeev receieves a call from an advisor:
Advisor: Mr.Rajeev, I am calling from XYZ insurance company and we have a very good savings plan for you.
Rajeev: What is it?
Advisor: You have to pay a premium of Rs.25 k annually and your money gets doubled in three years.
Rajeev: Great….How will that happen?
Advisor: Sir, our company is going to invest in Cricket World Cup,2011.Sir, as you know cricket world cup fever is just going to start our company will take full advantage of it.
Rajeev: But how do you guarantee a return of 100% in three years.
Advisor: Sir as i told you our company will invest in stocks of companies which are going to advertise in the world cup.As they will profit from it their share will rise and blah blah blah……
Rajeev: Ok let me think.Give me two days.
Advisor: No sir, if you want to invest you should do it today.This scheme will close tomorrow.
Aah!!! looks like the advisor knows very well who is going to win the world cup.Probably, family reasons forced him to enter a wrong profession.
Calls like these are not rare.Many a times you will see insurance advisors with unimaginable innovations luring customers to buy an insurance plan.I sometime’s wonder what drives them to make such confident calls.
Probably investors like us have the answer. What advisor in the conversation is trying to do is play on the psychology of short term investments. And attach a guarantee to it, we do not look at any other means even in our dreams.
The first reason to even hear for such a product is “Guarantee of Return”. Guarantee plays a very important role in our life.Even when we buy any household products or electronics the first question we ask is ‘What is the Guarantee that it will last longer”. So we follow the same in our investments and perceive that guarantee will take care of the future. But we forget that for any extended warranty in a product (e.g. Cars, Laptop and all others items), we have to pay an additional cost.
If you are a good investor, you will go deep into the product to understand that A guarantee in any investment product comes with an inbuilt cost, especially in insurance plan. Understand any ULIP product, which has guarantee of returns on your investment.You will come to know what cost you are paying for that guarantee.Recently, IRDA changed the rule for pension plan where insurance companies have to provide a minimum guarantee of 4.5% return in all Unit Linked Pension Plan. Hardly any company, except LIC, are selling pension plan today. They know, it’s not feasible to combine higher returns with a minimum guarantee.So in which world they can double the money in three years, that too without any investment rationale.
The other reason for us, as investors, to get attracted to such wonderful calls is that we invest without identiying our goals and objectives. Remember, all Financial Goals- Short term or Long Term has investment risk and return. So if we are looking at doubling our money in three years, then we haven’t identified our goals yet, which is the worst scenario for any individual.
Look at any new insurance product launch during these months, you will see the word Guarantee attached to it.In LIC new product-Bima Account- minimum 6% return is guaranteed, provided you run the policy till its maturity of Five to seven years.Now, with inflation at more than 7% wonder where this guarantee will fit into. So if you are saving for your child education or marriage for seven years, you will be actually losing money.
Thus it is necessary that before investing you are very clear on your goals and objectives. Remember, earning a higher return is not a goal but a step for reaching your goals with limited resources you have.The moment you take a wrong step, you miss your goal target.
In the end follow simple basic rules of investing;
1. Identify your short and long term goals
2.Understand your risk vis a vis returns you will receive.
3. Allign all your investment with your life goals.
4. Go for a second opinion if you ar enot convinced on any product.
5. Above all, be a Financial Literate.
Post Disclaimer
IMPORTANT DISCLAIMER!
This and All the other Articles/Videos on this blog are for general Information and educational purposes and not to be taken as an Investment Advice. Any Action taken by Readers on their Personal finances after reading our articles or listening to our videos will be purely at his/her own risk, with no responsibility on the Writer and the Investment Adviser. Registration Granted by SEBI, membership of BASL and Certification from National Institute of Securities Markets (NISM) in no way guarantee performance of the intermediary or provide any assurance of returns to investors.