How many times have you been told that if an item is more expensive, it is of better quality and will last longer? While this may stand true in case of certain products, it is one of the countless money myths floated in the market that affect your money.
Htmoney looks at three such myths:
Myth 1: Equity allocation should be 100 minus your age
You must have heard this—if you’re 25 years old, your equity allocation should be 75% of your entire portfolio allocation. It is true that when you are young, you should take more risk. However, this thumb rule will not work all the time. “It should depend on the time horizon of goals, individual’s risktaking ability and prevailing market valuations,” said Pawan Agrawal, founder, Investguru.in. You also need to take stock of your liquidity needs. “A young beginner may want to put money in safe and liquid investments to meet short-term needs whereas a retired person with a regular pension income may like to invest more in equity to maintain purchasing power,” he said. There can never be a one-size-fits-all rule for asset allocation.
Myth 2: Ulips and mutual funds give similar returns
The cost of a unit-linked insurance plan (Ulip) and a mutual fund is different. According to Melvin Joseph, founder, Finvin Financial Planners, before the introduction of direct plans in 2013, Ulips could still have been the cheaper product as their fund management charges ranged from 0.9 to 1.3%, whereas expense ratio for regular plans were in the range of 2-2.5%. “After direct plans were introduced, the expense ratio for which ranges between 1% and 1.5%, Ulips could not argue for being the cheaper product. The charges for Ulips don’t stop with expense ratios any way. You have entry, policy administration and mortality charges for the insurance bit. In mutual funds, if your fund underperforms, you have the option to move to other asset management company and change your scheme.
In Ulips, the escape route comes only after five years,” he added.
Myth 3: Buy realty for child’s education, your retirement
Real estate is generally proposed as an asset to serve your long-term goals. “However, the lack of liquidity, growth uncertainty and taxes during sale are various reasons why it rarely serves those purposes well,” said Agrawal. Also, you can’t sell real estate in fractions and exactly at the time you want to sell it, he added. Considering it is an illiquid asset, most people tend to see appreciation without the ability to cash in on it. “The main value of real estate remains locked in form of appreciation and is less realisable in the form of income,” he said. Moreover, external environment plays a big role in this asset class. Compared with real estate, financial instruments tend to work better for long-term specific goals.