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Wayward investing and loans for fancy expenses

LiveMint logoLiveMint 04-07-2017 Kayezad E. Adajania

In April-May 2017, Mint carried out a survey of around 19 financial advisors on the biggest mistakes they have noticed investors make (read them at bit.ly/2p2Va8U and bit.ly/2qxzhgG). Beginning today, Mint Money brings you a series of articles where an adviser delves into some of these mistakes, and recommends solutions to them. Over the next few weeks, we will talk to an adviser about mistakes investors make. Here we talk to Suresh Sadagopan, founder, Ladder7 Financial Advisories.

Asset Allocation mistakes: Are you attached to equities? Do investments in real estate make you feel secure? According to Sadagopan, that is a problem. “We had a client who wanted us to suggest only debt instruments as he was not ready for other assets,” says Sadagopan. “It’s like going to a doctor and telling him to prescribe what you have in mind,” he adds. He also remembers an investor who, despite having investments in real estate, was not able to liquidate it to fund his children’s education. He had to take a loan instead. “Clients tend to get attached to certain products or asset classes, which is bad,” Sadagopan says. Diversification: Diversification is necessary, but how much is too much? He says some investors believe that it’s better to have mutual fund schemes of all types. Sadagopan says that “appropriate diversification based on their specific needs, goals, risk tolerance capabilities, tenure and liquidity needs, and asset allocation requirements are not properly understood by the customers at large.”Chasing fads: This is not just limited to our wardrobe. “Some investors chase past performance. It could be real estate, equity, gold…anything. They are willing to entirely move from one asset class, into which they have invested earlier, into a new asset,” says Sadagopan. He says that investors need to understand the need to stick to a particular asset allocation and match their risk, tenure and liquidity requirements.

Random investing : Not knowing where to start and where to go can cause you harm in the future, warns Sadagopan. Not knowing your expenses and therefore keeping money idle in your bank account is not wise. “Hence, we have clients who have the potential to save Rs80,000, but invest just Rs20,000,” he points out. Idle money also gets spent fast, he says. Or, as said, “becomes the ground for random investments based on tips and fads like initial public offers (IPOs) and gold, which ultimately make for an incoherent and jumbo portfolio.”No coherent insurance strategy: Sadagopan says that investors pay premiums for many years, without understanding—or focusing on— the insurance cover. “We have had clients who came to us with 15 policies or more and still did not have the required cover,” he says. The problem, he says, also manifests as they buy insurance because someone in their family is an insurance agent. This is true with almost all clients,” he says. Sadagopan suggests that you need to evaluate how much insurance you really need. He also suggests that one should keep insurance and investments separate. Too much leverage: People live it up these days. If their income is not enough, people take credit,” Sadagopan says. But, this will work for a limited period only, after which it backfires “big time,” he warns.

Sadagopan notices personal loans taken for non-essential purposes (such as for holidays, lavish birthday parties, doing up the home) in some of his investors’ portfolios.

Apart from wasting money in paying up for these loans taken for lavish expenses, Sadagopan says that the problem snowballs into a big one if there is a job loss. “One needs to be careful,” he says.

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