scorecardresearchEndowment plan: Low risk is surefire way to keep returns lower

Endowment plan: Low risk is surefire way to keep returns lower

Updated: 28 Jun 2022, 03:00 PM IST
Not all millennials invest with the “millions making” mindset. Wired from birth against taking risks, they still stick to fixed-income life insurance plans. You may attribute their aversion to wealth creation to their unwillingness and inability to handle risks. Many feel dutybound to go by their parents’ decisions of parking money in endowment policies. 
Relying more on traditional plans for security rather than capital appreciation has refrained many from creating the desired corpus.

Relying more on traditional plans for security rather than capital appreciation has refrained many from creating the desired corpus.

Remember the first time when you discussed a new investment opportunity with your family only to be snubbed by your elders as being too modern? If you have faced resistance from your parents or seniors at your workplace regarding investment decisions, remember that you are not alone. This is because many people are impeded by behavioural biases while deciding when and where to invest their money. The affinity toward traditional plans and tax-saving investments continues owing to ignorance regarding new ways to park money or apprehensions against stock-related earning options.

Harping on traditional plans alone

Talk to any millennial about today’s investment options, and he or she would be more than willing to explore. Advise the same to the generation before, and you will find the oldies and grandpas jumping down to defend their decision of investing in endowment plans. Agreed that there is no harm in putting money in fixed-income instruments like endowment plans that may not yield too high returns (not more than six per cent) but guarantee peace of mind. Also, it helps impulsive buyers to resort to disciplined savings behaviour. This is because endowment plans mandate full payment of premiums before doling out guaranteed returns on maturity.

Irrespective of whether the market goes South like in recent times due to macroeconomic factors or the economy comes crashing down owing to recession or assumes the speed and gait of a bull, endowment plan investors feel secure and at peace with their investing decisions. Apart, these plans promise a lump sum benefit to the nominee in the event of an unfortunate demise, thus, ensuring financial security too. Savings keep the investors guarded against irresponsible spending behaviour while the maturity amount allows you to leave behind money to pay for essential expenses and responsibilities in your absence.

Instant gratification

We are still young, and retirement is a long way off. This mindset has kept many from putting money in long-term investments. We are indeed spoiled for choices, especially after the credit card industry lent us a taste of instant gratification. We now look for ways to earn money quickly. A two to three-year investment option is enough if it serves our purpose well. Investing in retirement funds seems cliché and old-fashioned, so must be postponed or ignored at best. Who cares about securing for tomorrow when life gives us the chance to indulge today? The bias against investing for tomorrow is another big reason why so many of us make mistakes while planning our investments in our wealth creation journey.

Aversion to losses

How many of us follow news and information influencing stock market information regularly? The current stock market rally has instilled hope while analysts continue to share a word of caution against going too rash on investments. Despite many stock investors having earned considerable high returns from the market, the fear of loss keeps many from parking money in stocks? “What if …” is the sentiment that emotionally guards most against identifying potentially good stocks and buying them? This aversion to loss mostly stems from an aversion to risk, which is synonymous with the age-old mindset of seeking refuge in plans that offer peace, albeit at the cost of high returns and the opportunity to create a corpus.

Today’s generation is wired differently. However, the itch to be in action is abruptly curbed with emotional blackmails and prolonged sessions of the miraculous benefits of relying on fixed-income instruments.

Follow the herd

How many of us have fallen prey to the mindset of choosing to save taxes over earning good returns? While some have argued vociferously in favour of investments with a high yield track record, many have succumbed to the lure of their fathers’ and grandfathers’ advice of investing in only those that help save taxes. This explains why many people rush to put their money in their Public Provident Fund (PPF) accounts or stick to only three years of investments in equity-linked savings schemes to benefit from their tax-efficient measures.

Wealth creation matters least to many people as they get stuck in a constant rigmarole of constant returns and the desire to save on taxes. The incentive to save is so strong that most investors are willing to forego returns in favour of assured returns.

This has had an unwanted bandwagon effect on many people of today’s generation that unwillingly invests in life insurance plans, especially, in the endowment policy category. This also explains why only five per cent of the Indian population invests in stocks and mutual funds as opposed to statistics in the United States that reveal a whopping more than 50 per cent of the people there buying and selling stocks actively apart from putting a part of their earnings in both active and passive mutual funds.

Many millennials live in the fear of missing out on opportunities to create wealth. However, they avoid the resulting emotions by arguing about how they had decided to follow in their parents’ footsteps hoping that the latter’s experience will quash their urge to undertake risks for rewards in the distant future.

One should make some smart investments to beat inflation, 
First Published: 28 Jun 2022, 03:00 PM IST