InvestorQ : What are the few misconceptions of financial planning?
Crowny Pinto made post

What are the few misconceptions of financial planning?

seema Upadhyaya answered.
9 months ago

Over the years, we have systematically busted many myths. However, due to the availability of wrong information, even some financial professionals believe these myths without considering how wrong they can be. But there are always such misconceptions that if not busted, it can jeopardize your financial health. Here’s a list of few misconceptions:

1. Pay long-duration loans first: This is the common mistake most financial professionals make, to pay-off long-duration loans quickly so as to save interest costs. However, the thing that they do not consider is the time value of money and compares the present cost with future cost without considering the impact of the time value of money. So, to avoid these issues one should consider the after-tax cost of the loan and repay accordingly, the most expensive ones first.

Pay the most expensive loans first, irrespective of expense: This is what people generally believe, however, if your investment can fetch more returns than your loan interest than it is always better to invest as with the same money, you can actually generate more benefits. So, it is not sensible to pay the loan, if your investment can actually cover the cost of your loan and derive you some additional benefit as well.

2. Risk is not for the middle class: This myth holds back the middle-class individuals from making risky investments, in the short-run, this could be a good policy. However, in the long-run having low-risk appetite will fetch lower yields and these individuals won’t be able to meet their requirements. So, it is sensible to take the risk if one is willing to fetch better yields in the future.

3.SIPs are risk-free in the long-term: Well this has to be the biggest of all myths, no investment come without risk whether it be any Systematic investment or Unsystematic investment, there has to be some sort of risk, there are chances that risk is reduced in the long-run, however not eliminated. The value of SIPs could also go into negatives if the market stays into a bear grip over a long period of time.

So, you should not just always believe what people have to say, you should analyze the situation first and then react accordingly.