All investors, not just in India, but across the world invest their hard earned money for various reasons. However, one common expectation as an outcome of their investments is capital appreciation or dependable return on investment. Amidst, the expectation of great return on investments, unfortunately, the fear of losing capital (or invested money) runs in the brains of many potential investors. This results in them missing out on many opportunities to appreciate their wealth and a later regret with a voice at the back of their head screaming “Why did you not make the sensible decision?”
This phenomenon in behavioral finance is popularly known as ‘Financial Inertia’. Under this situation, an investor is unwilling to make changes to or update his/her portfolios due to lack of attention or belief in myths. This inertia can be damaging in the long term, hence we shall discuss the top 3 myths all Indian investors should stop believing in to be more comfortable and confident in investing and growing their wealth.
*Hint: Myth 3 is the most common and deadly mistake*
Myth 1: GDP growth is directly proportional to the investment returns in stock markets and mutual funds
GDP, by definition, is only the sum of the money value all goods and services sold in the domestic market at the COUNTRY LEVEL. However, the growth of a stock is defined by the performance of the company and various financial factors specific to the COMPANY ONLY.
EXAMPLE: If I invested my money in shares of WealthOK.in Ltd. and its share price grew by 20%. I earn a 20% profit, irrespective of whether the GDP growth of India was at +7% or -7%. Hence, the 2 parameters are not directly correlated to each other and GDP growth cannot be used as a basis for investment decisions into capital assets.
Myth 2: Double your money in no time
Stock markets and mutual funds are not get rich soon schemes. However, in the long term (3 years and above), there is a strong possibility of you being able to generate multifold returns.
EXAMPLE: From experience, daily individual stock price movements fluctuate mostly in the range of +1.5% to -1.5%. Similarly, an equity mutual fund, made up of multiple equities, moves up or down in NAV depending on which stocks it is invested in. Thus, if you are invested correctly as per your risk profile, in the long term, you stand a bright chance generating good return on investment.
Myth 3: Cash is King (or bank balance)
This is absolutely false. We are living in times where the inflation of India is running at around 7.5% per annum. This means that your money is losing its purchasing power by 7.5% every year. FACT: Fixed deposits (FD) now offer just 4.5% to 6% p.a. due to revised rate of interests by the Reserve Bank of India (RBI). Thus, inflation will burn your money year on year.
EXAMPLE: Imagine you had INR 1 Crore in your bank account 1 year ago @5% p.a. Today, due to 7.5% annual inflation, the effective purchasing power of your money will remain equal to only INR 97.5 Lakhs. In real terms, INR 2.5 Lakhs were burned away and this crorepati is now demoted to lakhpati.
How would you feel if someone burnt 7.5% of your hard earned money, each year, and you just have to happily accept it?
This clearly proves that doing nothing has a huge cost to pay. However, in case you wish to bulletproof your finances, you must interact with a Chartered Wealth Manager, an expert who offers the luxury of personalized lifetime financial planning services, irrespective of your portfolio size or risk profile.