Have you ever invested in the stock market without any knowledge of the stocks you bought? Or bought an insurance policy because your agent thinks its tailor made for you? Or tried your hand in mutual funds relying on your friend’s advice? If your answer is yes then you inadvertently join the ranks of millions of likeminded individuals who invest on hearsay and despair when things go wrong. All this happens only because you lack financial knowledge and moreover think that investing is too technical to understand because you didn’t study commerce. Through this article I want to focus on some misconceptions about investing that thrive only because of our own ignorance.
Are you really insured?
The primary purpose of taking an insurance policy is to guard oneself and immediate family against unforeseen contingencies in the future, and hence in true sense of its meaning should be applied mainly to Term Insurance schemes, wherein the insured gets death benefit if any contingency happens within the policy term. The insured is, however, not entitled to receive any survival benefit if he outlives the policy term.
For example Rajan takes a term insurance cover of Rs 1 crore at the age of 25 ranging up to 65 years, he will pay as low as Rs 7,500 per year up until he turns 65. If he dies any time before he turns 65 his beneficiaries will receive the sum insured ie 1 crore, else if he outlives the policy term the premium paid by him ie Rs 7500 per Year* 40 years ( difference between maximum policy term age and the age at which policy was taken) will stand forfeited. Additionally the amount paid towards premium is also allowed as deduction u/s 80C of The Income Tax Act 1961.
Most people buy endowment policies, money back policies and ULIPs as insurance covers without realising that these plans are relatively costlier than the term plan due to the higher cost of commission they carry largely benefitting the sellers. If you expect to get returns on the premium during your lifetime, you might as well invest the money in any risk free asset without having to pay needless commissions on the amounts invested, and buy a pure term plan to meet your insurance needs. So with a little bit of understanding and prudence you can take the right call without relying on unsolicited advice. Remember if you haven’t taken a Term insurance yet, no matter what policies you carry in your portfolio, you technically aren’t insured.
Share market is like gambling
Some people who invest in the stock markets do so without understanding the difference between trading and investing. Trading is when stocks are bought and sold in a short span of time (usually within a day) and investing refers to buying and holding the stocks for a reasonably longer duration (usually greater than 36 months). With the urge of making a fast buck most people resort to trading in the stock markets based on little or no knowledge of the financial statements of the companies whose shares they trade in. That’s where things go wrong. Also the tendency is to buy shares when the markets are rising and sell when there is a downturn. That’s precisely why most investors lose money and curse their luck calling the stock market a gambling den, which is wrong.
Conclusion
Misconceptions are born out of ignorance, and ignorance exists due to lack of knowledge. Our system of education is lopsided; we are more concerned about the medium of instruction then the actual courses we study. Imagine if there is a course on basic financial management along with subjects like science, mathematics in the schools our children will be more confident and forthright about their financial matters. Academic qualifications are important and so is financial education but our schools are forgetting one of them.
