Seven must avoid financial products

These are 10 financial products which we must avoid. They don’t serve us but serve the financial company and agents who is selling them. Unfortunately many of these products you might be already having in your portfolio without being aware. Reason is most of them are sold very aggressively thru agents or so called “financial advisors” on high commission. Let me decode them for you.

1.                   ULIPS

They promise to provide you investment and insurance both but end up giving you virtually nothing. After 10 years of patience and paying annual premiums, the insurance you get is highly inadequate to take care of your family in your absence. The return you get on investment is much less than any good equity MF due to high costs associated. Your money is virtually locked for multiple year unless you are ready to pay high surrender charges which are very high up to 3 years and thereafter also it is substantial. Liquidity is very low and you are under obligation to pay yearly premium.

 

What to do: Keep insurance and investment separate.

 

Recent updates.

After recent interference from govt. ULIP is not as dangerous it used to be. Various costs associated with it have been reduced. One of the ULIP sold thru online mode is having 0 premium allocation charges. However still most issues remain and is not suitable in most cases.

 

2.                   Guaranteed returns

Market is volatile and a place where nothing is guaranteed in short term. Indians are obsessed with guaranteed returns in hope to make around 9% returns with no risk at all. Some financial products offer this but mostly after 7-10 years of lock in period.  Now if the same money is invested in even an average performing equity mutual fund the annualized return for 10 years is 15% or above (20% for good ones) with no lock in. This is the price you pay for guaranteed returns.

 

What to do: Invest in good equity MFs for long term else debt funds if your investment horizon is short.

 

3.                   Personal loans

Of all the loans, personal loan has highest interest rate and is most heavily marketed product. There are always better options than paying 15% of interest to the financial company.

 

What to do: In case you need money and running out of options go for loan against your PF.

 

4.                   Company fixed deposits offering higher than 12% return.

Any company deposit offering more than 11% return is a suspect. This is not a secured product unlike FDs which is secured by RBI. Higher interest rate means company somehow wants to raise funds urgently and not able to raise it.  This may lead to default if the financial condition of the company worsens.

What to do: Look for rating before going for company fixed deposit (CARE, ICRA, CRISIL etc rate these product)

 

5.                   Fixed deposit.

This may surprise many however we fail to understand that fixed deposits are not tax free. Any interest earned is taxed at source by the bank (subject to minimum 10k of interest from any branch). After TDS the return you get is not more than 6% (Not enough to beat inflation).

What to do: Arbitrage funds are highly tax efficient and offer better returns than FD due to tax efficiency.

 

6.                   Offline insurance & Money back insurance

Insurance agents are paid good commission on every insurance they sell. Their commission is charged from your annual premium resulting in higher costs for you. Online purchase can eliminate this.

Money back insurance is a misnomer. To get your money back in cases you survive the full insurance period leads to reduction in the insured amount. This defeats the very purpose of insurance and serves no purpose.

 What to do: Term insurance thru online mode is the best way to insure in most cases.

 

7.                   Excessive exposure to real estate

Real estate comes as a natural choice of investment for most Indians. However exposure of more than 50% of your net worth into real estate may be a bad idea. Real estate are most ill liquid assets, subject to regulation, litigations, high capital gain tax and need time and effort to manage. Though less volatile than equity but have not been able to beat them in long run (good mutual funds have beaten real estate returns due to zero tax and very high liquidity in long term).

 

What to do: Keep your exposure to real estate within limits (up to 30%)

 

    

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