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5 things NOT to do with your money
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December 11, 2006 09:45 IST

There are individuals who have some money and others who have more money. And then there are financial planners, investment advisors and agents offering advice on what one should do with his money.

Investment avenues like equities, mutual funds and insurance products like ULIPs (Unit-linked Insurance Plans) and endowment plans among others vie for a share of the money available.

It would be safe to say that we are spoilt for choices, thanks to the varied avenues available. Furthermore, we are in a situation wherein there is a sort of an information overload, in terms of what one should be doing with his money.

We thought it would be interesting to switchover and consider this discussion from a different perspective. In this article, we highlight 5 things that you must 'not do' with your money.

1. Don't hoard your money in a savings bank account

The savings bank account often ends up becoming a default option for storing one's money. This isn't surprising considering that most of us receive our incomes i.e. salaries and fees through cheques. But the trouble with this arrangement is that the funds are squandered earning a measly return of 3.50% (or thereabouts).

The same money can be better utilised by gainfully investing it in an appropriate investment avenue. Sure, liquidity is important. So you should set aside a sufficient sum to meet your day-to-day expenses and to provide for contingencies as well.

But the balance should be invested in avenues like fixed deposits (FDs), mutual funds in line with the investor's risk profile and needs. Considering that even an AAA rated FD yields an annual return of 7.50%, the savings bank account should come across as an unattractive "investment" option to most.

2. Don't invest your money based on hearsay

Never make investments based on hearsay. Your relatives, friends and neighbours need not be appropriate sources for availing investment advice. In any case, what's right for them need not be right for you. The right way to invest is by engaging the services of a qualified and competent investment advisor.

Steer clear of agents and advisors, whose 'core competence' is offering rebates against investment made. Similarly, don't associate with an advisor who only approaches you when an NFO (new fund offer) is launched. Instead, what you need is an advisor, whose mainstay is his expertise and prompt service.

3. Don't manage your money without a plan

No game can be won without a proper strategy; likewise investing without having predetermined objectives like planning for retirement or providing for children's education, among others could spell disaster. It's a bit like setting off on a journey without knowing what the destination is.

In fact, setting objectives should be the starting point of any investment activity. Having done that, the next step would be to draw out a proper plan. The investment advisor has an important role to play at this stage. Rigidly adhering to the plan at all times, should also be treated as vital.

4. Don't invest all your money in the same avenue

Investors would do well not to disregard the importance of diversification and avoid investing all their money in the same avenue.

The investment portfolio should be comprised of instruments and schemes from across asset categories. Over longer time frames, such portfolios are best equipped to deal with changing market conditions and deliver on the returns front.

For example, market-linked investment avenues like equities and mutual funds are likely to occupy a lion's share in a risk-taking investor's portfolio. However, assured return schemes like FDs and bonds should also feature in the portfolio (from a diversification perspective) since they can impart a degree of stability to the portfolio.

5. Don't lose track of your money

Investors should never lose track of their finances. Whether the money is in a savings bank account or available in liquid form, it pays to be aware of how the finances are placed. By doing so, the investor is placed to make well-informed financial decisions.

Similarly, it would also help to keep track of the investment portfolio. Changing market conditions, interest rate fluctuations and other factors could necessitate the need to make modifications to the portfolio.

For a Free download of the latest issue of Money Simplified -- The 2007 Guide to Tax Planning, click here!



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