A Quick Guide to Common Financial Myths Busted

Financial experts and investment advisors always preach that holding a stock for the long term can make you rich. But this may not be the truth in most cases. Many more such investment myths have been spread by investment professionals. Let’s look at some of them.

Myths and Reality of Investment Myths

Myth 1: Stock market gives better returns in the long run

Reality: Indian markets have generated very less returns in the past few years

Most of the financial planner says that the stock market gives better returns in the long run but what is the long run is yet not defined. If we actually analyze data the Indian stock market has generated very little return in the past few years. So long-term can be extended as per the convenience of the financial advisor. If his clients don’t get the desired result in the three years, he extends the horizon to five years or even further to 10 years.

Myth 2: SIP Investments always give better returns

Reality: SIPs are not a guarantee against loss and don’t always give higher results

The truth is SIPs do not guarantee against loss and don’t always give higher returns. When the markets are in a downtrend a lump-sum investment will always help as during really as you will earn better returns for these lump sum investments. While if you opt for SIP Investment, your returns will be less in this case due to an averaging effect.

The real benefit of the SIP Investment clicks in when it is continued over a long period of time and across market cycles.

Myth 3: Tax-free options are good investments

Reality: A tax-efficient option will give good returns than a tax-free one

Bank deposits and insurance policies are the two most popular investments in India. Almost 45% of the total financial savings of households go into bank deposits, while life insurance accounts for nearly 22%. Insurance policies offer tax-free income but the buyer ends up sacrificing too much.

Myth 4: Diversification gives better results

Reality: Buying too many stocks does not actually diversify your investments and give better results

We have seen many investors who purchase a number of stocks. Their portfolio includes more than 50 stocks while asking them, they said that they have done diversification and that it helps them to reduce risk and give better results. According to us, diversification of the portfolio is protection against ignorance. As you have a number of stocks in your portfolio, you cannot keep a track of all the stocks at a time as it may lead to a loss. Diversification can only be done by buying only a few stocks of different sectors so one can take advantage of balancing risks.

Myth 5: Mutual funds with higher ratings will perform better

Reality: Ratings are based on past performance and don’t guarantee future returns as well.

Investors in mutual funds often use the fund ratings to decide which schemes to choose from among the hundreds available. Though the rankings are based on robust statistical analyses and widely used methods of assessments, many investors read too much into these. This can lead to suboptimal investment decisions.

A fund’s rating by itself does not tell you whether it is a good investment or not. So investing in a fund based solely on its ratings would be inappropriate.