You must have gone through the previous post The 3 Mistakes of My Life - Financial Life : Part 1.
When I first started to read and learn about investment on different websites I realized that I have done a big mistake by not starting to invest early in my life.There also I came to know about various instruments of investment.I was shocked that how I was not aware of such useful products.
I had the belief that I was literate and have a good basic knowledge about everything.Thanks to the Google guru that broke my myth and save me from having a financial disaster in future life.
Unfortunately before knowing all this the second mistake has already been done by me.
-:MISTAKE NO 2:-
Investing without understanding the basic of the instrument
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I have the bad habit of being impatient most of the time.When I realized that I have done mistake by not starting any investment for so long,I started investing in two traditional endowment plans introduced to me by my neighbour who is a LIC Agent (nowadays everyone have one such neighbour/relative!).
He presented it in such a fancy way that I got attracted to it and fell into the trap.Like most of the investors in India I blindly believe the figures given by him and sign the policy form without reading the details of the policy.
Traditional endowment policies are marketed and presented in such a way that every investor gets attracted to it.The thought of good returns plus free insurance works like icing on the cake and everybody wants to have it.Agents will do anything to sell such junks products to you because who doesn't wants the huge 30% to 35% commission of the first premium you are paying.They will never reveal the truth about the various negative points of such plans.
Let us see why these traditional endowment plans are not correct for wealth creation and achieving our financial targets.
1) Hidden Charges
In an endowment policy following various type of charges are applicable.
- Policy administration charges
- Allocation charges
- Surrender charges
- Mortality Charges
- Fund management charges
2) Low returns
The final return after calculating all the bonus and the various charges of the traditional endowment policy will be around 5% to 6% only.In the nation where rate of inflation is around 8% it never makes any sense to invest in a product which gives lesser return.The value of the money is always going to be less and one can never achieve his financial goal by investing in such product.
3) Lock in period
The lock in period is one main thing the adviser is usually shy to explain.This is the mandatory period for which the the money must stay invested in order to derive the benefits.In case the investor wishes to withdraw the money in this period he will have to pay a huge penalty or he may not get anything.
Thus while making decision the investor should know about this fact and must look at the possibilities of any requirements for withdrawing in between and then put in the money.
4) Surrender Charges
The surrender charges are never mentioned by the agents to the investors at the time of the purchase.All the companies charge huge charges if the policy is surrendered before maturity. If policy is surrendered in first 5 years of investment the investor will not even get the amount equal to the amount paid in premiums.
5) Terms and conditions
Very few investors pay attention to terms and conditions of the policy printed on the backside of the policy paper.It is also purposely printed in such a small fonts that if even one tries to read it he may get headache.It is in our own interest and the interest of the family members whom we are trying to protect,which warrants a careful study of all the clauses that is mentioned in terms and conditions.
We should ourselves fill in the policy form and give the true information so that in any unfortunate event our family should not suffer while making the claim.
It is my sincere request to all the readers not to believe the insurance adviser or agents blindly because most of them will only disclose the features that provide a feel good factor and the aspects that may discourage you are conveniently remain hidden.
It doesn't matter whether the adviser is your good friend or close relative,you should first understand the basic features of the plan and only invest if the product is eligible to achieve your future financial goals.
You can read the 3rd Mistake here -The-3-mistakes-of-my-life-financial-life-Part 3
All the view in this article are personal,some people may disagree with it which is totally acceptable.