Thursday, May 6, 2010

Invstors education & transparent dealing are must for wealth creation

Now a days many people approach share market , mutual fund and insurance with a vengeance.But most of them do not take informed decision consciously. They try to invest because their friends and neighbors have made money in the share market overnight. This misconception of making money overnight is only a myth. In reality unless investment is made for long term most of the people have lost money.According good old saying keeping all the eggs in the same basket should be avoided. The same principle is applicable in respect of investment. The earned income of persons should be kept invested in different class of investment instruments. We always need to remember that , diversification is the name of the game when it comes to investment. IT IS THE RESPONSIBILITY OF Mutual Fund Association and insurance fraternity to educate investors so that investors can take informed decision in respect of investment and insurance. Just putting money recklessly by investors in FD, Mutual fund, in Stock or in Gold will not help them in getting the best overall returns. While all the investors need exposure to equities to get the growth in capital and in beating inflation in the long run., Debt instrument must be subscribed to avoid turmoil of the market. Hence it is advisable to invest into both equities and debt. It will help investors in getting higher returns from equities, while enjoying the capital safety offered by FD. To make investment and insurance investors friendly and savvy the Association of Mutual fund and Insurance must play a proactive role.

In order to educate investors IRDA has recently started clarifying important points through Media. According to the latest circular Partial withdrawal can be made only after five years of buying them, effective July 2010. Till now policy holders were in a position to redeem partly of their investment in three years. Many investors did withdraw early resulting in heavy losses. IRDA's new rule would prevent the situation. Hopefully when people redeem after fifth years there would higher returns. The distributors and brokers misguide or concealed information at times and that damaged the cause of investment rather than promoting creation of wealth. The transparent dealing is essential to build up confidence of the clients. While vending ULIPs some distributors failed to inform the clients that premature withdrawal( at least before five years) would land them in a state of loss, yet in case the full term could be survived it would give them handsome returns. Insurance companies have not given proper attention to educate the clients in this regards. IRDA have taken up the cause of protecting the insurance plans but have not taken up insurance education programme for the clients. Insurance is a product of solicitation. While soliciting business the companies,distributors and Advisers should be truthful and transparent.The new guideline for Mutual Fund distributors are in anvil, according to SEBI chairman .

With the stock markets in the continuous downward spiral, it comes as no surprise that nobody wants to invest in equity markets during recession. AMFI has a responsibility to educate their investors. The crash in the share prices during 2008 has proved to be a boon for the banks, whose fixed deposits (FDs) were ignored by the investors in favor of equities for higher returns. These banks came out with various FDs, offering attractive rates. This tempted many investors to opt for FDs. However every investor in FD must remember that FD is also an investment option and as with any investment option, it has its own pros and cons. So be prepared to get the complete overview of this investment option before opting for it.
At present gilt funds are doing very well. but how many MF advisers have asked their clients to invest in Government guaranteed Gilt fund? Presently some of the gilt fund are giving high returns( 8% to 10%) beside safety. The dividend out of this income is also tax free.This is ideal investment for senior citizens and risk averse investors at least for a year.

FD( Fixed Deposit) is also a term deposit. It is similar to a savings account, except that your money is locked in for a certain specified period, also called as term. Hence the name term deposits. However while you cannot access your money, the bank rewards you by giving you a higher interest rate than your savings account.The recent transparent direction of IRDA on death benefit is very good.In case of ULIP and Insurance minimum death benefit payable must be mentioned from now onward and ULIP s cannot be used to obtain loans from any sources. The death mentioned would not be mandatory for ULIP, the circular stated. From now onward the insurance policy would have to specify the minimum commission and provide illustration of benefits clearly

The term deposit is good investment option but not the best one. When inflation goes up( as is the case of 2010) the real value goes down. In 2010 when inflation is around 10% the FD rate for three years return provide interest at the rate of 7.5% This means keeping money in FD would incur loss for real value would go much below the rate of inflation.Remember, under such circumstances diversification would help realising better return. people may like to invest in GOLD ETF or may like to buy Paintings by reputed artists. Just putting your money in FD will not help you get the best overall returns. You also need exposure to equities to get the growth in capital and beating inflation in the long run. Hence it is advisable to invest into both equities , debt or in Gold and art segmentsd. To over come such situation a few Fund House have brought in Fund which invest only in Equity(25%), 35 percent in Gold ETF and 4o% in Debt instrument. It will help investors get higher returns from equities, while enjoying the capital safety offered by Gold and FD.

While discussing about the transparency and educating investors let us make some simple observation regarding Fixed Deposits in Bank. FD has various benefits that make it an ideal investment option for those looking for capital safety. But we donot recommend Fixed deposit in Private Limited Companies even if that company has been a market leader in their business. Once a great company like Carrit Moran, who enjoyed unenviable reputation of safe fixed Deposit, got busted and many investors lost huge money. FD of Bank is comparatively lot safer than equities, as the deposit up to Rs. 1 lakh is insured by Deposit Insurance Credit Guarantee Corporation. So in case, if the bank fails, your money is still secured. This makes an FD an ideal investment option for senior citizens.

Global Trust Bank got busted but deposits did not loose any money. These facts are never highlighted either by AMFI, SEBI or by IRDA. It should be noted that Unlike dividends given by the companies, the interest earned on an FD is fixed, as the rate of interest for the particular term is constant. Even if the rates increase or decrease subsequent to your opening an FD, your rate of interest will not be affected. So you are guaranteed a regular income, making it an ideal investment option for those looking for regular income.The FD of Bank help secure Loan in case of need. Are you looking for a secured loan? Then you can avail of a loan by offering your FD as collateral. While your FD continues to earn interest, the rate of interest for the loan will be a few notches higher than that of the FD. Hence this type of loan works out cheaper than any other type of loan, since the bank has the assurance of claiming your deposit if you fail to repay the loan > It is a proven fact that for those looking for an efficient tax saving investment option, FD is a good option. While ELSS has the shortest lock-in period of 3 years, your capital is not secured. On the other hand, PPF offers capital security, it has a lock-in period of 15 years. The tax saving FD offers the best of both the world, as your money is locked for just 5 years while your capital is safe.One thing must be kept in mind that in bank fixed deposit erosion of worth of capital due to inflation is possible. Inflation effect the purchasing power of the money. When the inflation goes up, the purchasing power of money goes down. As the interest rates of the FDs are lower than rate of inflation, the purchasing power of money deposited does go down. As a result, you end up eroding the worth of your capital. Except for the tax saving FDs, the interest earned is taxed. So you end up incurring tax liability. You are particularly affected if you are a high income earner. In equity you are free of Income tax liabilities so far as dividend is concerned. and there is no long term Capital gains tax.
Unfortunately most of the brokers of Mutual fund or advisers of Insurance have not clearly stated the advantage and disadvantage of their products. The clients get dis illusioned when they donot get expected rate of return in short term. All ULIP advisers must informed their clients that earlier than four years no great returns are possible. they can take out their money but with a fine which would mean loss of capital invested. The transparency and investors education would only help the cause of insurance and Mutual fund. Let the investors take a conscious decision after getting themselves fully informed and educated. Our society is evolving from a middle class mentality to a pro- capitalist mentality. During this transition transparency and investors education programme would ultimately help the cause of insurance an Mutual fund Industry more than investors themselves.

The best option for a middle class investor is to invest as per his personal goals. If you have any short term goals i.e. goals that have to be met within 3 years, like buying a car, or going on a holiday, then FD is your best bet. On the other hand, for long term goals like retirement planning or your child’s education, go for equities, Mutual fund and insurance products.

1 comment:

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