Most of the time we discuss and debate on investment products which yield better returns, which are safe, offer tax benefits and so on. However, what is also equally important is the need to identify products which need to be avoided. This carries greater significance for a beginner, since a bad investment not just makes a dent in his pocket but also destroys his confidence of creating wealth in the long run. Let us look at five such dangerous products for an amateur investor.
1) Life Insurance
Yes, you read it right. Life insurance is a dangerous product for investment. For some time, let us forget the protection it offers for the family in case of unforeseen event. If life insurance was an investment product, I would rate it as low as 2/10 (2 because of the capital protection it offers). Have you ever analyzed the returns that a traditional life insurance product offers? Of course, ULIPs may generate decent returns if held for 10 years or more. But, how many of you have held them for this long? If not, then what’s the point in purchasing it at all?
Now, let’s get back to discussion on traditional insurance such as money back, endowment, etc. LIC is a master in these. These products have generated returns of 5-6% p.a. Inflation has by far won the race against these products. So, the matter of fact is that people who have invested in them have lost their money due to ‘time value of money’.
Stock market is not a bad place for beginner per se. However, the reason why I have included this in this list of ‘to be avoided’ products is because of the methods used by beginners to invest in stocks. Ideally, one has to start by picking a couple of stocks after understanding the business of the company. Then, he/she needs to track it in different market cycles over a period of time. In this way, one can understand the risks in the market and invest accordingly.
But, reality is the opposite of expectations. What happens most of the time is that one buys random stocks based on few (so called) expert suggestions when the market is on a high (Market timing starts here) and then waits for market to go further up. It doesn’t happen. Then, frustration creeps in and he/she has to sell the stocks at a loss. After all this, stock market becomes a really bad place for investment. Hence, I caution beginners to start their portfolio with stocks. If they are really interested, they can do it with the help of someone who has gone through all this and is still invested.
3) Chit Funds
We frequently come across chit fund scams where investors keep parking their hard earned money and suddenly one day the company is ‘unavailable’. But, do we learn anything from these incidents? No. We still trust chit funds and believe they are the safest instruments in the world. For a beginner, losing money in the first few investments can be really heart breaking. In case you really love chit funds, try to choose regulated ones which are registered according to Chit Fund Act, 1982. However, I would suggest giving this a skip.
(Also see: Do not invest in Chit Funds)
4) Real Estate
Real estate in India is unregulated and because of this, risk in real estate investment is huge. Over the past decade, real estate has produced tremendous returns. However, the question of this trend continuing cannot be answered properly. Rather than making your first investment in an illiquid asset like real estate, it’s better for wait for some time.
5) MLM Schemes
Finally, Multi Level Marketing (MLM) or so called network marketing schemes. These are the ‘Make you Rich Now’ schemes which lure investors. Most of these schemes are illegal in our country but still manage to run until crores of money goes into them. What happens later can be read and watched in detail in media. I would advice all beginners to strictly avoid such schemes.