Tuesday, January 17, 2012

Neighbours are not financial wizards

Love thy neighbour is a common adage, but most people extend it to include financial decisions as well. For instance, a sustained rise or a sudden fall in the stock market is often observed due to frenzied buying in bubbles and selling in crashes.

In fact, as a recent study by Ameriprise Financial India shows, Indian investor even used this ‘follow the neighbour’ formula for purchasing insurance, gold and other financial instruments as well.

There are strong preferences for certain products in specific cities. No wonder, every city has its preference for certain instruments. Mutual funds and gold are preferred by Delhi, stocks are favoured by Mumbai, Chennai wants real estate and Bangalore is into debt. The survey was done between the age group of 28-45 and with an average annual household income in excess of Rs 12 lakh.

TWO DIFFERENT FAMILIES: YOU AND YOUR NEIGHBOURS
  • Goals, time horizon will differ
  • Risk-taking ability will differ
  • Financial commitments will differ
  • Age group may differ
  • They share successes, not failures
  • ...then, why follow them?
However, following the investment decisions of one's neighbour or friends or even relatives is not the best strategy. The culture of collaboration does not work while making financial decision for your family. There are a host of other reasons that should be considered while making investment decisions.

Your reason to save or invest may not be the same as your neighbour's. The other family may be investing for their child's school education, while you need it for higher education — clearly, the amounts required would be vastly different. For them, a 10-year debt instrument may work, whereas since the requirement is much more, you may have to opt for equity.

More importantly, your monthly outgo may be completely different. As financial planner Suresh Sadagopan says, individuals should count their priorities before copying. "When you have commitments, having cash in hand is important. And you have to account for it. But many don't," he says. Do not invest because somebody else is investing and he/she thinks you are missing out on something big.

Your neighbourhood uncle at 50 may be looking to earn 8.5 per cent on a 10-year NHAI bond, because it means a nice little safe corpus at the age of 60, when he retires. For you, at 30, it makes little sense. If the stock market falls further, there may be a good opportunity to enter and stay invested for the next 20 years.
Conversely, if you are 50, it makes more sense to stay away from high-risk, high-return products, because capital erosion is the last thing you want. Going with the good old bank fixed deposits or post office deposits may keep the corpus safe with steady returns.

Random investment is something that one should be wary of. The Ameriprise study talks about most individuals investing through real estate, insurance, gold and so on. But, none of these investors know if the asset class suits their profile.

However, you need to match your requirements to an asset class before investing. "For instance, real estate and start-ups could work wonders for some individuals, while it may end up being disastrous for others," explains Bimal Gandhi, chairman of Ameriprise Financial India. Therefore, do not pick a scheme just because good friends have done so.

Most important: It is unlikely that many will discuss their investment failures with you. Most will tell you about their successes. Certified financial planner Anil Rego says individuals see how their friend(s) have made money in an asset class/scheme. And then invest. "But, they fail to understand that this may or may not be the right time to enter that scheme. A classic example is gold and many are more than willing to enter gold now just because many have gained from it in the past year," he explains.

Source: http://www.business-standard.com/india/news/neighboursnot-financial-wizards/462019/

Post a Comment

Just click away from joining most active Mutual Fund India google group

Google Groups
Subscribe to Mutual Fund india
Email:
Visit this group

Aggrasive Portfolio

  • Principal Emerging Bluechip fund (Stock picker Fund) 11%
  • Reliance Growth Fund (Stock Picker Fund) 11%
  • IDFC Premier Equity Fund (Stock picker Fund) (STP) 11%
  • HDFC Equity Fund (Mid cap Fund) 11%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 10%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund) 8%
  • Fidelity Special Situation Fund (Stock picker Fund) 8%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Moderate Portfolio

  • HDFC TOP 200 Fund (Large Cap Fund) 11%
  • Principal Large Cap Fund (Largecap Equity Fund) 10%
  • Reliance Vision Fund (Large Cap Fund) 10%
  • IDFC Imperial Equity Fund (Large Cap Fund) 10%
  • Reliance Regular Saving Fund (Stock Picker Fund) 10%
  • Birla Sun Life Front Line Equity Fund (Large Cap Fund) 9%
  • HDFC Prudence Fund (Balance Fund) 9%
  • ICICI Prudential Dynamic Plan (Dynamic Fund) 9%
  • Principal MIP Fund (15% Equity oriented) 10%
  • IDFC Savings Advantage Fund (Liquid Fund) 6%
  • Kotak Flexi Fund (Liquid Fund) 6%

Conservative Portfolio

  • ICICI Prudential Index Fund (Index Fund) 16%
  • HDFC Prudence Fund (Balance Fund) 16%
  • Reliance Regular Savings Fund - Balanced Option (Balance Fund) 16%
  • Principal Monthly Income Plan (MIP Fund) 16%
  • HDFC TOP 200 Fund (Large Cap Fund) 8%
  • Principal Large Cap Fund (Largecap Equity Fund) 8%
  • JM Arbitrage Advantage Fund (Arbitrage Fund) 16%
  • IDFC Savings Advantage Fund (Liquid Fund) 14%

Best SIP Fund For 10 Years

  • IDFC Premier Equity Fund (Stock Picker Fund)
  • Principal Emerging Bluechip Fund (Stock Picker Fund)
  • Sundram BNP Paribas Select Midcap Fund (Midcap Fund)
  • JM Emerging Leader Fund (Multicap Fund)
  • Reliance Regular Saving Scheme (Equity Stock Picker)
  • Biral Mid cap Fund (Mid cap Fund)
  • Fidility Special Situation Fund (Stock Picker)
  • DSP Gold Fund (Equity oriented Gold Sector Fund)