Penny wise pound foolish

People are giving more importance to small decisions and they are ignoring big decisions. I don’t understand why people don’t go to the experts when they have to take big decisions like investments. Investments of your wealth are the biggest decision of one’s life and nobody is serious about it.

We read reviews when we go to watch a movie. We ask our friends and compare restaurant ratings when we have to decide where we have to go for dinner. We do a lot of research to select the school for our kids and spend a lot of money on the education of our children. We hire Event Planner to manage our functions (like Birthday parties, Marriage etc.). We hire an interior decorator to decorate our home. We go to the best doctor when we are ill. We buy the branded clothes and spend a lot of money on them. We just want best and nothing less.

When it comes to Investments, we don’t research much (I understand most of us don’t have expertise), but we can go to the experts. But I do understand, nowadays a lot of people say they are experts (in fact they are not). Every bank now has a Wealth Management team. The team is more like a sales team than a team of expert Wealth Managers. They have big targets to make sales and earn money. Most of the time they don’t consider the requirement of the client (actually they don’t have the expertise as well) and sell them the products where they earn the most. I surprise why don’t we ask for best advisor and wealth manager here. We don’t have a rating for wealth manager or advisor. Are we not serious for our biggest enabler (wealth)?

Most of us compromise on our dreams as we are not caring for our wealth generation. We end up generally with very fewer returns and paying higher taxes and commissions because either we don’t have wealth advisor or the so-called wealth advisors don’t have required skills and their main focus is generating more commission for their companies. Traditionally we have invested our wealth in Banks, Real Estate and Gold

Banks: We have seen our parents depositing money in the bank because money deposited is considered safe. I believe that the most important reason for them depositing their money in the banks was non-availability of other financial products freely. Is it wise to deposit money in the bank? No, it is not. If we take into account taxation and inflations, there has been negative returns on banks deposits. Bank deposits attract highest tax incidence and lowest returns because they are considered as safe. If your real money is declining in the bank, do you think it is safe there?

Real Estate: Traditionally we were investing substantial money in real estate and this has given very good returns until 2013. In last two decades with the wider availability of bank loans from different institutions like Housing Finance Companies, Banks etc, the prices of the real estate has increased to an unsustainable level and there is not much room left for further increase. Actually, there has been a negative return on real estate in last five years and I don’t expect a good return in the next 10 years as the real estate prices are still very high and unaffordable for the general public.

Gold: Historically we have also invested in Gold. Gold has now lost its attractiveness as a safe haven investment. Gold doesn’t have any utility itself and there are other better investment opportunities available so I believe there will be very low returns on Gold in the next 10 years. There has been a very low return on Gold in the last five years (2%).

It seems that I am now suggesting not to invest in banks deposits, Real Estate and Gold. Where to invest then? We have now lots of investment opportunities which in India we haven’t explored properly. Let me give some example of the products where we have not invested properly and wisely.

Equity, Government Bonds, Gold Bond, National Saving Certificate, Sukanya Samriddhi Scheme, Public Provident Funds, Non-Convertible debentures, Corporate FDs, Mutual Funds, Pension Funds, Hedge Funds, InVits.

I will explain in my next post why investing in these assets classes is wiser, and why you will make more money in the next 10 years investing in those assets classes.

Thanks

Vipul

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