In India, most people are not open to the idea of paying for professional investment advice. And these same people will easily pay a fee to doctors and lawyers for professional advice. To be fair, it is true that everyone doesn’t need financial advice. But it is also true that many do.
The kind of financial blunders many people make shows that even a small intervention from a professional (investment advisor) can really help sort out their financial lives.
The biggest mistake that most people make is choosing the wrong financial products. And this is what messes up their finances.
Let’s take an example.
A majority of Indians look at insurance as a kind of investment. They do not subscribe to the idea of pure term insurance where there are no survival benefits. They fail to see the logic of why insurance and investment should be kept separate. As a result, they end up putting money in traditional insurance plans (like endowment, moneyback, etc.).
Suppose you go for an endowment plan which costs ₹1 lakh in annual premium. The policy tenure is 15 years. Indians love these types of plans as it gives them a large amount of money on maturity. And many buy this for their children thinking that it would help save money for their children’s future.
But what most people fail to realise is that such hybrid products (endowment plans) offer just about 5% kind of returns if you calculate it correctly. So, if you buy such a plan, at most you would get about ₹24-25 lakh after 15 years.
This may look like a decent amount, but wait and see what the alternative would have been if you knew which was the right product to choose for such long time horizons.
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Proper investment logic demands that when investing for the long term, we need to invest in inflation-beating assets like equity. Historically, good equity funds have delivered 11-12% average returns. And a good investment advisor would have recommended investing in equity funds for long term goals which are 10-15 years away.
Now see what would have happened if this ₹1 lakh annual premium amount (in the earlier example) was instead invested in equity funds. Your annual ₹1 lakh investment for 15 years at 11% would have given close to ₹38-39 lakh, which is a lot higher than what you got in endowment policy (at 24-25 lakh).
This is just one example of how if someone took professional investment advice, he or she would have been suggested to invest in the right products.
And this is where the idea of the real cost of being in the wrong financial products is much higher than the actual cost of investment advice.
Please don’t get me wrong. I am not saying that everyone should go and get professional investment advice. Nothing like that. Many people are fully capable of picking the right products and doing the right thing. But at least for those who are unable to manage their finances well, it is better to take external help. It of course costs money, just like you pay fees to doctors, but it is worth it.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.