Here's why mixing insurance with investments should be avoided

Financial planners have a ringside view to the mistakes we make with your money. Mint has been tracking this space not to point to what people do wrong, but to see how we can rectify them.

This week we speak to Maher Dhamodiwala, founder of Financial Artists, a Mumbai-based financial planning firm, to find out what he saw wrong in his clients’ money lives.

A road that goes anywhere

Investing without a purpose doesn’t take an investor anywhere, said Dhamodiwala. And this is the first mistake he spots when he meets most of his new clients. “Many investors invest without a goal. Then, after buying mutual funds for some time, they don’t rebalance or follow any asset allocation. Investment without a plan is a car without a GPRS," he added.

In a recent story, Mint had highlighted the dangers of how buying MFs randomly—from several distributors or platforms over time—can blow up into something unmanageable.

Buying anything and everything

A consequence of taking a road without direction is that you end up buying several unrelated and unnecessary financial instruments. This could also happen if you listen to “too much of advice", albeit unqualified advice.

“Many people take advice from their friends, uncles, father, chartered accountant and so on who have no or less idea about investments. They want to buy any hot tip or 5-star rated funds without realising how it will affect their overall financials. And then, they land up with a portfolio with 25 to 40 mutual fund schemes or scrips, said Dhamodiwala.

He suggested a remedy, saying investors must consult a financial planner if they are serious about building a decent to good corpus in the long run. “Counselling on financial plan makes them understand how their present decisions impact their financial goals. Once they understand that their present run rate is not enough to win their match (life goals), they are willing to change," he said.

Not enough insurance

Mixing insurance with investment is a common mistake that Dhamodiwala finds in many investors’ portfolios. “They don’t plan for wealth protection; they think LIC (Life Insurance Corp. of India) is investments," said Dhamodiwala. He said that investors must have a term plan, and just that for their life insurance needs. “Mostly all are underinsured and they feel that a term plan is a waste of money as no money comes back if they survive," he added.

In reality, this is what insurance is all about. You pay a premium for an eventuality. If the event doesn’t happen, you lose the premium. If the event happens, your nominee gets the money. That is also why the term plan policy premium is very low, while you can invest the rest of the money in a pure investment vehicle.

“While the older generation of clients still come with a portfolio full of LIC policies, thinking they have the perfect insurance as well as the perfect investment, the younger generation seems to have a better understanding and say they want to stick to term plans. Surprisingly, many of them eventually lose faith when they don’t see any ‘returns’ from their term plans. So we sit with them and educate them," said Dhamodiwala.

Mixing business with investments

Businessmen should keep their businesses separate from their personal wealth.

Dhamodiwala tells the tale of one of his clients who owns a large fleet of cars and has built this fleet by taking car loans. Of late, because the client has been continually expanding his business, he would not hesitate to take more and more loans to add more cars. “If he could buy 10 cars out of his own money, he would borrow money from a bank and buy much more, say 30 cars," said Dhamodiwala.

This, he added, is dangerous and if business slows down, such people get saddled with big liabilities. Once the business gets self-sufficient, businessmen must turn their attention to building their own wealth and keep leveraging to the minimum.

Love for real estate

Investors may not be in love with real estate at the moment, but Dhamodiwala said that many investors who walk into his office for the first time have held multiple properties.

Apart from a poor growth rate that real estate investment has over the years as compared to equities, many investors also pay high equated monthly instalments as loans, that puts additional pressure on their finances.

Source: Livemint