Important Financial lessons that can be learned from FIFA 2014

You must be surprised after reading the title of this article as there could not be any relation between your finances and FIFA world cup until and unless you are into betting. Still there are many lessons that can be learnt if you analyze the complete situation of the current FIFA world cup. Here are some of the insights that I have analyzed and want to share with you all.

Never rely on Past performance:

Everyone is betting heavily on Spain's performance this world cup as they are the defending champions. Now the result is in front of all of us, they are not even able to clear the first round and are out of the world cup.

Same goes with our investments as well. Some plan does well in past does not guarantee its performance in the future. Past performance is always one of the criteria to consider one particular stock or mutual fund or any plan, but it’s not the only criteria. Always have a thorough study of the plans you want to invest into before actually making any investment decisions. 

Don’t let your emotions overpower your decisions:

In the match between Germany and Portugal, one of the Portuguese players – Pepe got carried away and head butted one of the German players. This resulted into his exit followed by a RED card. There was no need to do so and the 10 player Portugal team ended up on losing side.

Similarly in case of making any investment decisions, don’t let your emotions overpower you. As a human we have a tendency to remember our bad moments for the life time and forget the good ones very quickly. Same logic follows in our financial life as well and we refrain ourselves from taking a look to those plans again which haven’t delivered good returns in the past. This is a dynamic world and things keep on changing every other day. Lot of regulatory agencies constantly trying to protect investor’s interest and thus companies have to adhere to these changes and they keep on implementing the same to their products as well. Thus if most of us had burnt our hands with ULIP plans in the past it does not applies same for today as well. Always make your decisions based on facts and not on sentiments.

Don’t get carried away with success:

In the match between Netherlands and Spain, Spain was the one to score first goal of the match. There won’t be any good start for the defending champions to this tournament. They got carried away after that and lost the match with a score of 5-1.

Similarly if one of your investment results into very good results it does not mean you don’t look at other avenues and start investing in that particular plan only. As the famous saying goes, don't put all your eggs in one basket. For example, if you have invested in Gold in early years it would have delivered you huge profits but if you keep continuing this investment even in the year of 2013-14, you have ended up with loses.

One good stock pick won’t make any one an expert. If you don’t have sufficient time and expertise, Mutual Fund is the best way to proceed forward.

Consistency is the KEY:

As we know Germany is one of the consistent performers in all the big tournaments, they have won 3 world cup titles and 3 European championships. They are doing well in this world cup as well.

Similarly in the financial field if a stock or a particular Mutual fund is performing well over its peer in the long term than it’s surely one of the safest best for you to invest into. Always try to track the last 10 year performance of any Mutual fund or stocks before actually investing in the same. Never get carried away by the schemes which promise to make you rich quicker. Choosing consistent performer over rising star is always a better bet especially for someone having low risk appetite and limited income.

Time to realize realities of Life

In today’s era Money has become one of the most important part of our life, without which we can’t imagine our existence. But are we always practical in our approach when it comes to matters related to money? Consciously or subconsciously we keep telling ourselves some lies related to money matters. Some of these are due to ignorance and laziness and some are legacy of the past.

In this article I will highlight some of the key points about which we need to start thinking positively and start accounting for them.

I do not need additional health cover as I am covered by my employer:

Generally, working personals are covered of their medical expenses from their employer, but is it enough for an individual or not is something you need to evaluate. Generally Health Insurance from employer has many strings attached to it and do not provide sufficient cover to the entire family. One biggest point is that while you are between switching jobs, you and your family is without any cover. Also once you retire you will end up without any cover and at that time buying any health cover will be too costly for you. Also, you should keep in mind that there are certain diseases for which health insurance companies provide cover only after certain period of time. For example, BP or sugar related diseases are covered from 3^rd year onwards. Therefore, once you switch job your association with new health insurance provider starts with zero which might impact you and your family.

I am young enough to start thinking for Retirement:

Planning for new smart phone, foreign holidays, new car are some of the choices prevalent among the young ones rather than to save for their retirement. All of us generally believe that it’s just the start of our professional career and retirement is way ahead to think of it from now. As one of the famous idioms goes – ‘The sooner the better’, same is the case with retirement planning as well. The early you start, the more benefits you can reap on retirement. Below is an example to explain things better.

A and B both invest Rs 5,000 per month through SIP in a diversified equity fund till they are 50 years of age. However A starts at the age of 25 years and B starts at the age of 30 years investing a total of Rs 15 lakhs and 12 lakhs respectively. With the additional investment of Rs 3 lakhs and the power of compounding of returns, A is able to earn Rs 8,802,617.84 more than B! (The return is assumed at 14.45% annually)

Source: www.eksipkikahani.com

  

Why to buy mutual fund if I can choose the winning stock:

Investing directly into equities can definitely gives you better return in comparison to investing into equity mutual funds, but that needs in depth analysis and thorough understanding of equity market. When market is in upswing mood, as they are currently, they have the potential to give you better returns but newbie generally ends up with their hands burnt. They do not have the requisite expertise and they go with the sentiments and ends up with losses.

Thus the expertise of Mutual fund manager and their diversified portfolio ensures that your investment won’t go off the cliff. You can still buy equities directly from the market but investing a part of your money via mutual fund gives you the requisite diversification to your portfolio. As the expert saying goes: if your stock return beats the Mutual fund returns over the long term, you are in the wrong profession J.

Buying Term plan is waste of money:

Many individuals believe that buying term plan is completely waste of money and it’s better to invest in life policies having maturity value. For us it’s very difficult to get convinced on a product in which we are not getting anything on maturity against the premium paid. Thus we prefer to invest in endowment plans. Term plan is the pure unadulterated form of life insurance and thus charged very low premium and gives high risk cover. I will suggest buying a pure term plan with a combination of SIP in debt fund and you will get much better returns than an endowment plan.

Bank Fixed Deposits are the safest Instrument:

Many of us still believe that Bank FDs are the safest instrument to invest in. This in fact is not true. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insure deposits of up to `1 lakh per customer across all branches of a bank. This means that any deposit amount higher than `1 lakh with a bank is at risk in the event of default by the bank. Most importantly, they are not the tax efficient instrument. The return from FD is clubbed to individual’s income and taxed accordingly. Thus for a person in 30% bracket, the effective return from 9% FD will be 6.3% after tax. Hence you have to look out for other investments similar to bank FD’s. One of them is tax free bonds issued by government undertakings. From safety perspective they are comparable to that of bank FD and the return from them are completely tax free in the hand of investor. Similarly FMP from mutual funds are other investment where yield is not fixed but they give the advantage of indexation in the hand of investors. (In my another article, I will explain in detail about indexation)

I do not need to draw up my will:

Many of us never give importance to writing up will or majority of us still believe that it’s something for super rich people only. This is completely baseless and we have to change this mentality. If something happens to you, your loved ones have to do lot of running to prove they are the only legal hires. If you want to save your loved ones from all of this hassle and want to ensure that they can take advantage of the wealth that you have created for them, please make sure to have your will on time.