Debashis Basu explained how one can invest in a mix of financial products for retirement and other goals
In the second part of “Back to Basics: Investing & Insurance”, Debashis Basu, editor Moneylife, educated the audience about various asset classes and how to allocate savings effectively in each. Most savers are clueless when it comes to savings. They earn, spend, and whatever is saved is kept in bank fixed deposits with no savings plan. This habit, Mr Basu cautioned, would leave little money for meeting future goals such as buying a house, children’s education and retirement. Mr Basu spelt out various ways to be smart with money and how to invest safely.
Mr Basu took the audience through how they can plan their investments for different goals. He urged people to be cautious and avoid making mistakes and lose capital. However, too many investors are lured by the image of big financial brands or glib talk of sales staff hawking their products. These include stocks, mutual funds, gold and realty.
He explained the difference between investment products and speculative investments and the impact of inflation on their savings. He demonstrated how inflation erodes the value of their nest egg.
Stocks and equity funds are the best assets available for creating long-term wealth. The best way to invest in stocks is through regular investing in equity mutual fund schemes. He pointed out how much one should invest in equities and fixed-income products. There are various fixed-income products available, but one should choose those that deliver tax-efficient returns.
On gold, Mr Basu said the metal is a precious, but speculative, investment and cannot be valued since it does not pay interest or dividend. The price of gold is only derived by what others are willing to pay for it on a given day.
If you buy gold, betting on guaranteed returns, based on previous price trends, you may be in for a nasty surprise. This has been Moneylife’s stand for over three years and the recent crash in gold prices demonstrated the risk it carries.
Mr Basu also pointed out that all talk about high returns on realty is based on anecdotes rather than hard data which is simply not available in a uniform, standardised form over a long period.
Mr Basu said that people must differentiate between a house that one buys to live in (which can also appreciate significantly) and realty as an investment which will be bought and sold.
Realty carries high transaction costs in terms of stamp duty, transfer charges and taxes. This leads to significant erosion in returns.
He warned against mixing investment with insurance through products like unit linked insurance plans (ULIPs) saying, “there are better investment products available at lower costs that can be used for investment.”