The second part of Moneylife Foundation’s event titled—‘Back to Basics: Investing & Insurance’, Debashis Basu, editor, Moneylife, educated the audience on the various asset classes and how one can allocate their savings in each to save effectively for retirement. Most savers are clueless when it comes to financial savings. They earn an income, they spend, and whatever is saved is kept in bank fixed deposits. There is virtually no savings plan.
If such a habit continues, Mr Basu cautioned, that one would end up with much less money for all future goals such as buying a house, child’s education, etc. and even retirement. Mr Basu, in his presentation, spelt out the various ways in which one can be smart with money and presented to the audience the best way in which one can invest safely.
The best way to start investing safely is by planning your finances, he said. Mr Basu took the audience through how they can plan their investments for different goals. The best investment lesson is to be cautious and avoid making mistakes and losing capital. However, too many investors are lured by the image of big financial brands or glib talk of sales staff hawking their products. Mr Basu explained the various asset classes and the risks they carry. These included stocks, mutual funds, gold and realty. He explained the difference between investment products and speculative investments and then took the audience through a clear understanding of the impact of inflation on their savings and how it erodes the value of their nest egg.
Stocks and equity funds are the best assets available for creating long-term wealth. The best way to invest in stocks is through regular investing in equity funds. He pointed out how much one should invest in equities and fixed income products. There are various fixed income products available, but one should choose those that deliver tax-efficient returns.
On gold, Mr Basu said that the metal is a precious but speculative investment and it cannot be valued since it does not pay interest or dividend. The price of gold is only derived by what others are willing to pay for it on a given day. If you buy gold betting on guaranteed returns based on previous price trends, you may be in for a nasty surprise. This has been Moneylife’s stand for over three years and the recent crash in gold prices demonstrated the risk it carries.
He also pointed out that all talk about realty returns were based on anecdotes rather than hard data, which is simply not available in a uniform, standardised form over a long period. Mr Basu said that people must differentiate between a house that one buys to live in (which can also appreciate significantly) and realty as an investment, which will be bought and sold. Realty carries high transaction costs in terms of stamp duty, transfer charges and taxes. This leads to significant erosion in returns.
He warned against mixing investment with insurance through products like unit linked insurance plans (ULIPs). These investments involve huge costs and there is no long-term data readily available on the fund management performance. However, there are better investment products available at lower costs that can be used for investment.
Examples were shown on how one could use the power of compounding to their benefit. “The best way to invest smartly is to start as early as possible and save as much as possible”, said Mr Basu.