In April-May 2017, Mint surveyed 19 financial advisers to know some of the biggest mistakes investors make (read about them here and here. Over the next few weeks, we will talk to more advisers about these mistakes (read about them at: www.livemint.com/investor-mistakes). Here is Deepak Chhabria, chief executive officer, and director, Axiom Financial Services Ltd., a Bengaluru-based distributor of financial products, talking about his experiences.
The rush to save tax
Many people often wait till the last minute to make tax-related investments. This could lead you to take wrong decisions. “I often come across…ad-hoc investment made at year end to avail tax benefit, often under pressure from employers to submit proof of same. The same could have been initiated at the beginning of the financial year when enough funds were available,” said Chhabria. He added that if tax-planning is done at the start of a year, investors can avail tax benefits and also earn returns from the beginning of the year, which should ideally be the case.
Another aspect of ad-hoc tax planning is being seen in some sections of investors these days, after the Union Budget proposed to reintroduce the long-term capital gains tax on equity. As per provisions, although the gains till 31 January 2018 are protected, the Budget’s provisions would apply only from 1 April 2018. So, should you sell before 31 March and book tax-free profits? “Not necessary. Here again, be cautious. The net asset values of equity mutual funds has been down so far this year. If you don’t make any gains between 1 February and 31 March 2018, then there are no gains for you to book before 31 March,” said Chhabria.
Too much insurance
Is it possible to be underinsured while still holding lots of insurance policies? Yes, said Chhabria. It’s common to see portfolios with too many mutual fund schemes. But too many insurance policies are also a mistake that many financial advisers see in a new clients’ portfolio. “I remember an instance where 35-40% of client’s salary was going towards premium payment. Despite this, the life cover was inadequate,” he said. One of the first set of portfolio clean-ups is to sell expensive and unsuitable insurance policies, to free up the resources.
But doing this is difficult because it often requires taking the painful decision of surrendering some of these policies, sometimes even at a loss.
Misuse of personal loans
We borrow for several needs: education, home, even a car. But too much borrowing can lead our finances astray and adversely impact our investments. Chhabria does not recommend dipping into savings to tide over temporary cash flow mismatches. He also warned against availing loans for consumption, without realising the cost involved. He once met a couple that was paying four equated monthly instalments towards personal loans taken to fund overseas holidays; they were having difficulties meeting even their living expenses.
Dividend unfriendly
Many investors casually choose dividend payouts in mutual funds. Apart from the thrill of seeing some money in their bank accounts occasionally, dividends from equity funds were also tax-free so far. But a tax-free status can still be harmful to many investors if they don’t really require the dividends. “This sacrifices the benefit of compounding,” said Chhabria. With dividends now being taxed at 11.648% (dividend distribution tax), it makes all the more sense to choose this option wisely as every time your fund declares a dividend—effective 1 April 2018—it will be taxed. “If there is no need for income and the investment is for the long haul then growth works best,” he said.
The hurry to book profit
Picture this. You get the consolidated account statement one morning and you see your portfolio is up 20%. What do you do? “Sitting on a profit is the most difficult thing for some investors; fear of losing the same in a correction often leads them to take the gains out in a hurry, forgetting their investment goals,” said Chhabria. In the bargain, they sacrifice large future gains and benefits of compounding.
Chhabria noted that this doesn’t necessarily happen only to novices or first-time investors. Often experienced investors too fall prey. “Periodic market corrections are an integral part of equity investing. For this asset class, patience is the virtue that helps in long-term wealth creation.”
[“Source-livemint”]
