Top 5 investment myths busted
Investing is the best way to secure your future goals and achieve your dreams. Be it for child education plans, retirement goals, or other goals, investing can help you generate wealth and avoid accruing debt while chasing them.
Traditionally, middle-class Indians have tended to play safe when it comes to their wealth. Investment seems like a needlessly risky game for many. However, it is time to bust some myths and mitigate your worries.
Once these common myths are busted, the investment will not seem as foreign and dangerous anymore. Read on as we separate fake news from fact!
1. Investing is the same as trading
Trading is when you buy assets in the stock market and sell them after a short term to generate a quick profit. Traders are looking to make short-term gains by predicting the future behavior of certain stocks. Their profits depend on market unpredictability.
Investors are not banking on unpredictability. Investors look for relatively stable stocks and bonds or basket securities in which to invest for the long term.
When you invest money you do so with the expectation that the price of the asset will rise, slowly but reliably, over the course of a long time – usually years.
Thus, investment is nowhere as risky as stock trading. In fact, it is a fairly secure and reliable way of passive wealth generation.
Investors favor diversified, well-managed portfolios and often look to mutual funds and ETFs because they are structured, balanced, and professionally managed.
Short-term market fluctuations do not generally affect your long-term investments. Minor setbacks tend to average out over time.
Investment is a good and responsible method of financial planning for your children’s education plans, homeownership goals, etc.
With a strategic investment scheme in place, you can send your child to study abroad and give them the best global opportunities.
2. You need a lot of money to start investing
This is another completely unfounded myth that discourages a lot of middle-class Indians from investing in stock market assets. Investment is certainly not just a rich man’s game. It can be an incredible way of compounding wealth for all kinds of people.
There is a misunderstanding that you have to invest a huge amount of money all at once to get good returns. This is not true.
You can invest slowly and at your own pace. Many mutual funds in fact offer SIP (Systematic Investment Plans). These plans enable you to make small monthly investments starting as low as Rs. 500 or even Rs. 100.
Ultimately the amount of money you invest and how you invest it will depend on your financial goals and capacity.
For example, if you are investing for the sake of your child’s education plans and your child is still young, you can start with a relatively modest SIP. Because of the long-term nature of the investment, your money will still grow splendidly.
This is an especially harmful myth because it discourages the exact people who can benefit the most from strategic, long-term investments.
3. Past performance of a stock is a guarantee of future returns
Stock markets are volatile and the performance of any particular stock is dependent on a lot of different factors. If a stock is performing well today and has performed well for even the last 10-15 years, it is no guarantee that it will still be good 10 years from now.
Times change and so does the market. A company may be doing well today but future events can cause it to unexpectedly shut down.
This is why you should avoid investing based on past trends alone. Most casual investors actually do not have a lot of expertise in choosing or selecting stocks.
This is why it is advisable to invest in basket securities like mutual funds and ETFs when you are just starting out. These funds are professionally managed and have a team of experts who select appropriate stocks and figure out the right opportunities to buy and sell.
If you have more specific goals you can consult with financial advisory services that specialize in goal-based financial planning. A service like EduFund can be extremely useful for you for education planning and child investment schemes.
4. I am too young to start investing
There is no such thing as being too young to start investing. Investment is planning for the future and you can never be too young for that.
You may think that investment is not an ideal option for you when it’s still early in your career and your salary is fairly low.
However, as we have noted already, you can start a SIP for as low as Rs.500 or even Rs.100 a month. Even for a fresh graduate, this is not a huge amount. In addition, it can help you cultivate the good financial habit of regular investment.
You may also think that you still have a lot of time and don’t need to think of long-term financial goals just yet. However, that is a short-sighted attitude to have.
The earlier you start investing the better your returns will be. If you have a young child and you want them to study abroad, it is better to start investing now rather than later.
5. FDs are the best investment for middle-class families
FDs or Fixed Deposits have been the traditional investment instrument of choice for the Indian middle class. The reason for this popularity is that FDs are extremely low-risk.
You deposit your money with a bank for a fixed amount of time and on maturity, you receive your original principal, plus interest.
There is little to no risk of losing your deposits. FDs typically have higher rates of interest as compared to regular savings accounts.
Even with interest rates that are higher than typical savings accounts, the returns on FDs pale in comparison to investment options in stocks, bonds, funds, etc.
This does not mean FDs are completely useless. They can be a good, low-risk investment for less expensive financial goals. However, for something like study abroad education plans, you should strongly consider investing in mutual funds or ETFs.
What is the 5% rule in investing?
The 5% rule in investing states that any broker is not allowed to charge more than 5% as commission.
What are the 4 common investment mistakes?
Not conducting your own research before investing
Following hearsay or influencer finance advice
Not knowing the taxes and expenses involved like expense ratio or exit load
Failing to diversify your investments
What are some common investment myths?
Here are some common investment myths:
You need a lot of money to start investing
Investing is only for financial advisors or the rich
FDs are the best investment for middle-class families
Past performance of a stock is a guarantee of future returns
What are the rules of investing?
Here are the rules of investing to keep in mind:
Start saving today
Diversify your portfolio
Protect against loss
In this time of increasing costs, you cannot always depend on savings and FDs. Good investment decisions and a reliable and balanced portfolio are key to achieving your goals.
Investment generates wealth and prevents your money from losing value due to inflation. Thus investment is also a way to protect yourself and your assets from inflation.
Don’t let myths and fake news hold you back. Do your research, educate yourself and invest to fulfill your dreams.
Consult an expert advisor to get the right plan