Read this chat conversation with one of my old classmate in Graduation .

Manish : So where are you going to invest you money this year ?
XYZ : May be PPF or Bank FD
Manish : But do you think they would give you good returns ? also they would be locked for a long time , dont you need that money in near future ?
XYZ : Not exactly! , actually i can leave that money invested for more than 5 yrs , or may be 7-8 yrs too ..
XYZ : also , But i would like to invest some money in mutual funds … around 20k , May be i need some money to send to my brother for his MBA coaching ….
Manish : hmm.. But i think you should do exactly reverse . Invest this 20k in FD and Rest money in Mutual funds + PPF or only mutual funds .
XYZ : No no , i cant !! , i have already lost 50% in mutual funds this time , i cant take risk now , i am fine with less return but a secure one …
Manish : hmm… i told you dont put all money in lump sum . you never heard !! .
XYZ : I invested because i trusted you , I thought you know more than me , but it fell so much … you gave wrong advice at wrong time.
Manish : Dont you think it was your desire for high returns which made this happen ? Equity are risky ? i told you this too !! .
XYZ : Whatever …
Manish : ok .. np … Consider what i said … goodnigfht …
XYZ : night

What is the problem of these people ?

First they need high returns , then they cant wait for long term to get that kind of return . They just hear that equity are risky but don’t believe it ,they will make you feel that you are responsible for the crash . They just don’t take responsibility for what they did !!

What I actually told her ?

I told her that its ok to invest at these high levels but don’t invest in Tax saving mutual funds as they will be locked for 3 years, also invest less and that too through SIP (What is SIP) , so that it can eat up the volatility and insure less losses if things go wrong .

But the only things on her mind was:

- It will save her tax
- Will give superb returns like it did during 2002-2007 (these are the people who dont read “Equity investments are risky and passed performance is not guarantee for future performance”)
- If she does SIP and markets goes up and up , she will be buying less units.

This is a classic example of “Overestimating Returns and Underestimating Risk”

How should you do your tax planning for the year ?

First thing , if you have not done your tax savings yet, its a bad thing . It should be done at the start of the year itself , at least planned .

If you need money for short term goal , don’t invest in Shares or mutual funds !! Put it in some assured investment instruments like FD.

“Return of investment” is more important than “Returns from investments” .

If you have money which you can invest for long term , invest in Shares or Mutual funds (but only for long term). As per your risk taking capability choose combination of Debt and Equity and invest for the long term …

Why Equity ?

Do you know that most of the stocks have beaten down so much that they have come down below than the price they deserve , There value has exceeded there price (Read about Value Vs Price) .

Unitech : One of the largest and most respected Real Estate companies has fallen down to levels which are unimaginable !! from 532 to 40-50 .

Tata Motors : Nano will be manufactured in some months , every thing looks so good , but people just sold it because of Singur tension (It was fine to sell it , but now its oversold) .

there are countless examples like this in current market . Things will go fine , but with patience .