Read an interesting article in ET by my college alumni #Dhirender Kumar, CEO of #value research on what they don’t teach in financial literacy. He was referring to a research study in the US which found that people who were financially literate were more susceptible to financial fraud than those who weren’t. This 2006 study was conducted by a non-profit organisation called the FINRA Investor Education Foundation. The study revealed that people who became victims of fraudulent investment schemes had a higher score on financial literacy tests than those who hadn’t fallen victim, by a statistically significant 27 percentage points.
He goes on to make a point that if a person is making bad personal financial decisions, whatever kind of knowledge he possesses does not qualify as financial literacy. It may be called financially literacy by those who provide it, or those who possess it. It may superficially resemble what financial literacy should be like, but it cannot actually be financial literacy. Problem lies as most financial literacy lessons are delivered by vested parties who teach what they want you to learn. As per him we should also have a list of what not do. This kind of resonated with me as I am on a mission to spread Financial Awareness among the natives.
Here is my list of what not to do
- Buy life Insurance as investment: India is plagued with the misnomer that insurance is investment because of which people end up buying confused plans which don’t offer either full risk coverage nor optimize return on investment
- Buy any mutual fund without asking a few questions: Investments in mutual funds are a prudent decision however choosing the right scheme is also very critical. Mutual fund investments should be done as per an individual’s risk profile. In addition investor should understand the fund house reputation, no of years the scheme has been in existence, 3/5 yr CAGR (compounded average growth rate) before finalizing the investment.
- Buy life insurance when you are 60 years of age: a few years back a well meaning personal banker from a reputed back sold a high interest yielding life insurance policy to my father. I was disappointed that my own father fell for the scam. But that’s how persuasive agents can be. My simple question to my father was, Why do you need life cover at the age of 60 when you have no dependants? What risk are you insuring? We were able to return the policy in the free look period.
- Buy health insurance from card companies without checking the following: I must admit health insurance plans offered on most credit cards are quite attractive but you must know the following before buying:
- Is the insurance offered under group or individual plan?
- What will happen to the insurance if you close the card in policy year?
- Next year on renewal will the premium change? In retail plans premium is locked for a age band and only changes when one crosses the age band. This is not true in case of group covers offered by most credit card companies
- Buy insurance to save tax: I know of people who buy an insurance plan every year to save tax. Again buying insurance only for tax planning is not prudent.
- Buy ELSS more than Rs 1.5L: ELSS or equity linked saving schemes are mutual funds which are recognized for exemption under section 80C of income tax act for exemption till Rs 150000 only. These are closed ended schemes and generally offer returns less than equity mutual funds. Investments in these should be restricted to Rs 1.5L only
- Buy inadequate health insurance: Most people are only aware the yearly premium that they pay on their health insurance and not the coverage. Be aware of the health cover and take an adequate cover commensurate to your age and income.
#investments # Financial Awareness