India has a rich tradition of passing down teachings and wisdom through oral communication. While in older times, it was sages passing down knowledge to their pupils, this tradition has now expanded to include everyone. Elders from all walks of life now pass on their learnings and wisdom to guide the next generation. They do so to help them navigate the world with ease and to live a safe, fruitful and prosperous life. They are often communicated to you by your relatives or other elders in the form of advice and suggestions. However, well intentioned as they may be, there are many cases where your elders’ advice could actually end up being unsuited for you.
In this piece, I’m going to highlight three such outdated pieces of ‘investment wisdom’ that don’t hold good anymore.
Physical gold is a good investment
Since time immemorial, gold has been coveted and prized as a ‘valuable’ metal. Even today, gold is considered to be a sign of prosperity. However, when buying gold you need to be clear on what you’re buying it for, if it is for ornamentation, jewellery, coins and the like, then sure, buy away. However, if it is for investment purposes, financial gold is much more suitable than physical gold.
Financial gold refers to instruments that derive their value from gold, and have gold as the underlying investment but on paper. They are cheaper as there are no making charges or wastage charges. You don’t have to worry about storage and theft, and they’re easy to buy and sell. I recommend keeping your exposure to gold at around 8 to10 percent of your investment portfolio. This will help you diversify among other asset classes so that one acts as a cushion when another under performs.
Real estate gives superior returns.
Another favourite of the old guard is real estate. Many people harp on about how their property fetched them massive returns on selling it. However, what peoplefail to note is a) the time period over which they ‘earned’ these returns, b) the other costs over and above their purchase price that went into maintaining their property and c) comparing the returns of the same investment made for the same time period in other investments such as the equity markets. If you factor these in, the returns don’t seem as impressive anymore. In fact, the equity market has given significantly higher returns than prime locations in Mumbai. The only reason people ‘earn more’ in real estate is the ‘discipline’ they show in holding on to their investments. Similar good investing habits from proper research to the discipline to hold on in equity investments could garner far superior returns.
Fixed Deposits (FDs) are the best way to invest.
There was once a time, back in the 90s, when bank FDs were delivering double digit returns some as high as 12%. However, that time is in the past. Today 3years or longer FDs from banks such as SBIs have an interest rate of just 6.5% to 7% per annum before taxes. After taxes, this comes down to just 4.5% for those in the highest tax bracket! This barely beats inflation, giving you scarcely enough growth to build any significant amount of wealth.
On the other hand, mutual funds have delivered significantly higher returns. Long-term debt mutual funds as a category have delivered an average return of 9.8% over the three-year period ending May 11, 2018. Add to this the indexation benefits that these funds enjoy, and your posttax returns end up being significantly higher than those of FDs.
So, the next time someone pops up with one of these pearls of investment wisdom, make sure you take their advice with a large pinch of salt. Do your own research on what’s the best investment option in the times you live in, speak to a financial advisor if required, and then make an informed decision on what’s best for your money. Remember, old isn’t always gold.