Investors must understand the risk profile of any asset class before investing in them, says Bimal Gandhi, president, Ameriprise India, a US-based financial planning firm. In an interview to Surabhi, he says that retirement planning should be started when a person gets his/her first regular job. Excerpts:
What are the most common investment myths?
The most common myth is that we can get 20 per cent returns every year with no downturn. People still believe that investments come with no risks —whether it is gold, real estate, equity.
The second big myth is that insurance is the best investment. Insurance is a good investment but the primary purpose of it is protection and we have to understand the level of protection we are looking for, the term of that protection and the portfolio effect. That means there should be a right combination of term and investment in our portfolio.
Also, in the absence of any advice, most people believe that their neighbours and friends actually know what they are doing. It’s astonishing how many people rely on that.
The fourth myth, according to our research, is that though India has become more affluent and materialistic in the short term, values and families still come first for Indians and so the bulk of their assets are geared towards the protection of their family.
The last myth is that it people believe it is all right to invest in a product without really understanding it. What surprises us is that in conversations with new clients, many don’t understand the concept of risk profile. They are willing to risk in order to not make returns but they are not willing to lose the capital. So in terms of investment, it is almost an oxymoron.
What is your take on the debate on investing in equities?
It is a portfolio effect, first and foremost. You shouldn’t put all your money in a single asset class, it has to be diversified. Also equities come with risk, probably higher risks than most other product classes.
So becoming a direct investor in the equity market, when you’ve never traded a stock before, is not the right thing to do. It has to be done gradually. Start at a fund, then move to a specialised fund, then to equities if you want a more direct exposure. Also, understand the risk profile and time horizon before investing in equities.
What is your advice