Individuals nowadays are very much aware of healthy financial practices for a stress-free life. But there are some money myths, that are quite common and people are unaware about. The money myths can be related to- credit card usage, buying health insurance policies or motor insurance policies for tax deduction, mega sale discount shopping and much more. Here we will discuss some simple money myths and the real fact behind it.
Myth 1- Long term mutual fund investment offers compounding power
Fact- Mutual Fund Returns are not fixed, so compounding effect is not applicable
Mutual fund returns are really appreciating in the long term. But there is no relation between mutual fund returns and compounding effect. But what is compounding? It is the process of adding interest to the interest rate that is already accumulated till then. The mutual fund returns and equity returns are not constant and vary each year. Based on the mutual fund returns in 10 years, it was around 31% in 2017 but fell down to 1.1% in 2018. On top of that mutual fund, returns can also be negative in some years. No interest rate is generated against mutual fund returns in 10 years or more than that. As compounding effect is applicable in case of compound interest rate, so, it is not applicable for mutual fund returns.
Myth 2- SIP Investments are secured and the possibility of losing money gets nullified
Fact- Equity Mutual Fund SIP investments offer lower risk but do not nullify the risk factor
SIP for mutual funds help in protecting mutual fund returns from the market volatility but does not cancel out the loss during the market downturn. With SIP investments, you get to practice a disciplined financial habit. During different market cycles, mutual fund sip plan safeguards against the volatile market. But sip investments can only reduce the risk of market volatility but does not guarantee against losses. Mutual fund returns are dependent on the fund performance and not on sip for mutual funds. At the time of market fall, you must continue with mutual fund sip plan for long term goal purpose. After the market downturn, the investment offers gain. Also, long term sip investments generally offers a better return.
Myth 3- Multiple credit card usage lets you in a debt trap
Fact- Your spending does not depend on the number of credit card you own
Usually, easy cashless transactions with credit cards are believed to increase your spending. But the truth is overspending is a habit which does not depend on multiple credit card usage. Based on your income and spending habit, people must go for credit card usage. You can improve your credit score by paying the card dues for credit card usage. Also, you will enjoy high credit card limit and low credit utilization ratio by opting for multiple credit card usage. With fuel surcharge waive, reward points, credit card usage also offers huge discounts and other exciting benefits. So, multiple credit card usage provides high limit but the spending decision depends solely on you.
Myth 4- Online discounts on mega sales
Fact- The discounts are almost similar to the stock clearance sale
According to a survey, during the mega discount sale, the online orders increased 4 times more than the non-sale days. With attractive adds and exciting offers, online shopping sites give you not-to-miss great deals but they are not so profitable as they try to project. The brands provide at max around 17% discount on sale days which is basically to push the unsold stocks. So, it is not true that online mega sales offer a huge discount. Moreover, the original price before the discount labeled is raised often to make you believe that the discount is really high.
Myth 5- Fixed returns is ensured with small saving schemes
Fact- The Interest rate is dependent on the market and changes in every quarter
Generally, small saving schemes are mistaken to provide fixed return and zero risks. But saving schemes like- NSC, PPF, Senior Citizens’ Saving Scheme, etc. though offers security but do not guarantee any fixed returns. The interest rate offered on saving schemes are linked to government bond yields and is effectively market-linked which gets revised every quarter. If you look at the previous year returns, the saving schemes have generated lower returns.
Myth 6- The tax-free corpus generated from insurance is a huge profit
Fact- If inflation is greater than the investment, then the indexation automatically makes it free
Tax deduction during health insurance policy or other policy maturity is a great way to attract investors. Under Section 10(10d), the maturity amount will be free from a tax deduction in case the insurance policy cover is at least 10 times the annual premium. But this is not a big benefit. If your investment takes into account the indexation and earns lower than the inflation, then it will be tax-free. In reality, indexation is not applicable for insurance unlike for mutual funds or real estate.