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Financial-Myths
General

There are many financial myths out there in the big bad world. Some of them are out of sync with the present – they were true once upon a time but are no longer so. And then some of these myths are simply marketing tactics that have been repeated and seen so many times in popular media that people feel they are true—nothing could be farther from the truth!

Without further ado, let’s take a closer look.

Only the Wealthy Can Afford to Invest

This was true 40 years ago in the 1980s; no more, though. Financial institutions realized long ago that investment tools need to be made available to the middle class along with the upper class to stay profitable. What’s more, survey data suggests that a middle-class family is more likely to invest in instruments like mutual funds, endowment plans, and fixed deposits than citizens in upper or lower classes.

What are Endowment Plans, you ask? These unique insurance-cum-investment plans allow you to invest regularly to not only earn a handsome amount in return by maturity (typically at your retirement), but also financially protect your family in case you are the victim of an early and untimely death.

It’s Always Better to Buy a Home than Rent One

This is another myth that was true once upon a time. In India, Real Estate has been going through a correction phase for the last 4 to 5 years – for very good reasons. “Correction” is a fancy way of saying that nobody is ready to buy homes anymore due to extraordinarily high costs. This is especially true in metropolitan cities.

Those who do buy homes with the help of loans end up paying high interest rates and doing a juggling act with their finances for the next 15 – 20 years, often compromising on the quality of education they can provide their children and the location of their family vacations. All this because housing loan EMIs eat up a significant part of their monthly salaries. Wealth Managers in India suggest you shouldn’t opt to buy a home unless the monthly EMI for a term of 15 years is less than 20% of your family’s monthly take-home salary.

Renting has the following advantages:

  • Flexibility – For example, to change your location in case traveling is too stressful due to distance and traffic.
  • Tax savings – The homeowner not only pays real estate taxes, but the tenant also gets tax rebates under Section 80 (GG) if s/he is not paid HRA in their salary.
  • Free Maintenance and Renovation – For instance, if you moved into a home that already had a geyser in the bathroom and that geyser then develops issues, the expenses towards repair or replacement will be borne by the homeowner. Similarly, renovation of the home (usually done every 2 – 3 years) will be done by the homeowner, which is otherwise a large expense.

Mutual Funds Are the Best Option to Achieve Long-term Financial Goals

Until a few years ago, Fixed Deposits were considered the best option to achieve long-term financial goals. In fact, some people still opt for FDs even though the post-tax profits from FDs are almost as low as bank deposit interest rates!

Largely because of the marketing campaigns behind it, people now believe Mutual Funds are their best shot when it comes to long-term financial goals. Unfortunately, though, MFs are not the right answer either. There is a financial instrument that is far superior to these, known simply as ULIPs. Let’s look at the blow-by-blow breakdown of why ULIPs are superior to MFs and do not have any of the disadvantages that mutual funds come with: 

  • Lower Charges – Most Mutual Funds attract a fund management charge of 2.5% of total assets. For ULIPs, this charge is capped at 1.35%, nearly half.
  • No Tax Burden – With Long-Term Capital Gains (LTCG) tax of 10% being applicable from Jan 2018 on all dividends in equity and equity-oriented funds, those who have invested in mutual funds have to pay a high cost when they want to withdraw their investments. On the contrary, gains made in ULIPs are completely tax-free.
  • Same Returns as Mutual Funds – Since ULIPs and Mutual Funds operate in the same markets and give the customer the choice of instruments, risk exposure, and so on, they are exposed to the exact same risks and make similar gains.
  • Hassle-free Movement between Debt and Equity Instruments – In Mutual Funds, when the customer chooses to move his funds between debt and equity instruments, it attracts capital gains tax. In ULIPs, there are no capital gains taxes when you move funds between debt and equity instruments.
  • Added Life Cover – In addition to all the advantages mentioned, ULIPs also provide life cover. A large sum of money will protect your loved ones in the event of your untimely demise if you are actively investing in a ULIP.

Read: 5 Reasons Why ULIPs Are Superior to Mutual Funds

Visit here if you would like to know more about the best instrument out there to create long-term wealth.

I Have Credit Cards, so I Don’t Need an Emergency Fund

This is one of the flimsiest myths widely believed to be true in our country. An emergency fund is useful in cases where there is a hospitalization in the family or some other major expense that has caught you off guard. Credit cards come with a limit and also very high rates of interest. The debt you will accrue if you choose to pay for emergencies through credit cards is not financially healthy or viable over the long run.

Fund Managers suggest an emergency fund should always be maintained that will not be touched in any eventuality but emergencies. They suggest a corpus of 6 times your monthly income is a healthy figure. DO NOT PUT THIS MONEY IN ANY INVESTMENT INSTRUMENT. IT SHOULD BE IMMEDIATELY ACCESSIBLE THROUGH AN ATM WITHDRAWAL OR BEARER CHEQUE.

Our advice would be to maintain this emergency fund and simultaneously invest in a family health insurance policy that covers your entire family for premiums as low as a few thousand rupees annually.

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