You shouldn’t expect profits from these investments
NEW DELHI : The fundamental purpose of investing is to fulfil financial goals and create wealth. However, not all investments are meant to generate profits. We tell you three important investment avenues where returns don’t matter.
Life insurance: The essence of life insurance is that in the case of your death, the insurance company will pay your family a set amount that will help them tide over the financial difficulty arising out of your death. If you survive the term of the policy, you or your family get nothing.
The desire to earn something out of the insurance premiums you will pay to the insurance company may prompt you to buy traditional plans. It’s a bad investment choice as traditional plans neither provide adequate insurance coverage to your family nor do they offer sizeable returns. A money back policy delivers a paltry 4.5-6% through the 20-year policy term. It is recommended that you buy a pure vanilla term policy for your life insurance needs.
Emergency fund: An emergency fund is supposed to act as a buffer for unplanned scenarios, such as a job loss or a medical emergency. The purpose of setting up such a fund is to get easy access to liquid money, as an emergency always strikes unannounced.
For this reason, the decision about which instrument you should pick to park your contingency corpus should be a function of how secure and liquid that avenue is and not how much return it will earn. Parking this money in equity or even a debt mutual fund might erode some of its value in the short term during a market downturn.
A savings bank account, liquid fund or ultra-short term debt fund are the best avenues to build your emergency corpus. These options are low on risk and highly liquid. While a bank deposit is completely risk-free, the money will be right in front of you, which might tempt you to spend from it on things other than an emergency. A liquid fund or an ultra-short term debt fund takes care of this. It locks the money away from your sight, while providing liquidity of that a savings account.
Gold jewellery: Gold is a good option to include in one’s investment portfolio. But, doing so in the jewellery form is a bad investment choice.
Gold jewellery holds sentimental value and you are unlikely to sell it to meet a future financial goal. If you do sell it, you’ll aspire to buy jewellery in its place sometime in the future. Besides, selling jewellery eats away into the ornament’s value in the form of making and wastage charges, which can add up to 10-30%.
Gold bonds, digital gold and gold exchange-traded funds (ETFs) are a better way to include gold in your investment portfolio.