Points to ponder for women making investments

Businesswoman Trying To Catch Flying Money

Businesswoman Trying To Catch Flying Money  

Understanding the nature and role of asset types will help improve financial returns

Investors build their portfolio from among the choice of products at their disposal. And women, more than men, often work with a limited bouquet of offerings that fit within their comfort zone. To add to this, the risks and return potential of these financial products are not understood. As a result, while they make investments, limited wealth is created.

Gold buying

One popular choice among women is buying gold. Purchasing the yellow metal is simple, with easy access. Besides, there is ample liquidity to sell the same. Also, you can pledge it to raise money anytime. And the returns are sweet — if you had bought gold a year ago, you would have got about 20% return. So, why would gold not be a good investment option? For one, the paper returns for gold are hardly realised when buying jewellery, which is the most popular option.

For instance, there are various costs added to the product that greatly reduce the net return, unless you purchased coins. Two, storage of gold can be risky and add to your costs such as the cost for renting a storage locker. Three, gold can be unwieldy when building a large portfolio. For instance, if you plan to build a net worth of ₹1 crore, you would need 3 kg of gold. This is not easy to manage.

Suggestion: Consider buying gold in non-physical forms such as ETFs or e-gold. It is good to have less than 10% of your portfolio in gold investments as the long-term return potential is debatable; you can tactically change the allocation based on market outlook.

Chit funds

Another popular choice, due to its accessibility, is subscribing to chit funds. This is a household product that enables savings and comes with the potential to avail loans. The advantages for many women, especially in smaller cities, is door-step service. While chit funds have reasons for their popularity, there are downsides. For one, there are high risks in unregistered chit funds where frauds are quite rampant. And, default by any borrower in the group can affect not just the returns but also your principal.

As a result of the risks taken by the person running the chit operation, transaction costs are high and often, this is not well understood or documented. Even excluding the risks, the returns in a chit scheme are not easy to calculate.

For instance, there is a sequence of periodic cash flows that varies monthly. You receive a lump sum amount somewhere along the investment period. Calculating the internal rate of return (IRR) for this is not easy and if you do so, it will show that the return is not high.

Suggestion: Unlike in the past, there are many investment products that are available online. It is good to learn about them and expand your choices rather than go with proximity as the criteria.

Insurance schemes

Insurance providers such as LIC offer schemes that score high among women.

This is primarily due to the push factor from sales agents who are known to them and hence, offer trust and comfort. The problem with many of these schemes is low return. This is not obvious due to the nature of the product. For instance, there is a sequence of investments you make over a period and there are payouts in a later period.

This requires complex calculations to work out the annual rate of return.

Also, if you stop premium payment, the policy would lapse and may lead to loss of money. And often, there is heavy mis-selling in insurance and the agents may not be upfront about the various clauses — which adds to risk of loss.

Suggestion: Consider insurance as separate from savings. Ask for annual return numbers for the product and check the terms on payment lapses.

Fixed deposits

Opening a fixed deposit (FD) seems like a simple and no-risk idea and many women take to this. While there are no risks or complexities in this, the downside is the lost opportunity — the rate of interest is usually low, especially if you consider taxes.

Also, the term of the FD is often selected without consideration to the interest rate outlook. For example, you may pick a one-year term as it gives a good rate.

But if rates are on a downward trend, locking the rate for a longer period would be better to maximise return.

Suggestion: Keeping a small pool in fixed deposits for emergencies is a good idea. Any further returns on savings may be obtained through debt funds, bonds or other instruments.

Women must take a holistic view of their finances and not stay within their comfort zone of investment products.

There are many temptations including sales pressures, proximity, familiarity and anecdotal evidences of returns, to pick the known choices; but knowing the downside of the products will help you see their role in the portfolio and not over-invest in one, to help maximise return and manage risks.

(The author is an independent financial consultant)

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Printable version | Feb 19, 2020 11:53:04 AM |

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