Since I was a child, my father repeatedly told me one thing: If you have surplus money, put it in the bank or open a Fixed Deposit (FD) account.
‘This way you will earn interest on your investment and simultaneously beat inflation.’
A good lot of you must think that this is indeed an ideal advice.
This article will make you realize why it isn’t.
Mistake 1- Putting the money in the bank
“Just put your surplus money in the bank/FD.”
All of us has have heard this from our parents/relatives at some point in time.
Now, if you’re nodding to the fact I stated above, let me be a myth buster and tell you, it was a lie!
Let us now analyze the philosophy that has gripped almost everyone in this country for a long time.
What are the problems with fixed deposits?
Fixed Deposit is an amount you pledge to the bank for a certain time frame. Then you can interest on this pledged amount.
Many people say it is very easy to ‘break’ an FD and thus is liquid (even when it is not!).
Most FD’s give an interest rate of 6-7% per annum.
Now, if you ‘break’ the FD before time, some banks even ask for a penalty. This not only reduces your interest but also reduces the principal value, if you consider inflation rates.
Thus, in a way, you lose money if you invest in a bank/FD, even when you think it has increased because of inflation.
Investing 101- the course you never took in college
Don’t let the fear of the unknown frighten you from investing.
Invest your surplus savings in liquid funds.
These funds have almost no exit load, hence they let you redeem your money as and when required. They have also proven to give much better returns than banks/FD.
The major misconception which many investors have (even the learned ones) is that they won’t be able to withdraw funds instantly.
In reality, you can redeem your investments as and when you like.
Mistake 2- Putting your money in commission based Mutual Funds
“Invest through regular mutual funds”.
Difference between the regular mutual fund and the direct mutual fund is that direct charges zero commissions while regular mutual funds have 1-2% of the amount invested.
SEBI decided in 2013 that direct mutual funds should also be there to encourage the retail investors in mutual funds.
Some people are aware of mutual funds and the benefits associated with them. But what they’re not aware of is that they can earn roughly 1-1.5% more on their investments per year.
Why should you invest in direct mutual funds?
You should invest in mutual funds because these are handled by experts who are certified investment professionals.
Direct mutual funds are zero commission mutual funds and help you save even more. You can see the impact of direct mutual funds on your savings in the next section.
For a person with a white collar job, it is hard to track the market. While fund managers are paid to do just that and they’re good at it.
What is happening currently is that there are many people who have already invested for 10-20 years in regular funds without being aware of the presence of direct funds. Thus they end up loosing so much of savings.
Let’s check some numbers
Let’s put things in perspective.
Suppose you are investing Rs. 5000 in regular funds every month since the age of 25, till you are 60.
Assuming your returns were 12% per annum, you would have spent 6.23 crores on commissions only!
Had you invested the same amount in direct funds (zero commission), your total wealth would have been 29.16 crores at the age of 60!
After reading this article, we hope you will avoid committing these mistakes, won’t you?
Disclaimer: The views expressed in this post are that of the author and not those of Groww