issue xxxvii         
Eight mistakes to avoid while investing
From overconfidence, to over-enthusiasm to panic selling, there are some mistakes an investor should avoid while playing in the stock market. Investing is not just about picking winners, but also about avoiding mistakes. Retail investors can be better off if they avoid making the following mistakes.
    • Overconfidence — Don’t be unrealistically optimistic    
    A bull market makes retail investors believe that they are geniuses — after all, anything they put money into goes up. This overconfidence in their own abilities leads to a complete disregard of the risks involved. Every new generation that invests in the market ignores past experience. These new investors wrongly believe that stock prices only go up.

Don’t be overconfident and don’t start believing that you have superior skills compared to the market. Recognize that in a bull market you are benefiting because the whole market is going up. If those around you are getting unrealistically optimistic, start managing your risk accordingly. Remember that sometimes markets do come crashing down.
    • Over enthusiasm to trade – Not every ball should be hit    
    Good batsmen realize that some balls outside the off-stump should be left alone. Similarly, professional investors realize that sometimes it’s better to just stand still than to rush into a stock. Retail investors often make the mistake of “flashing outside the off stump” because they cannot resist the temptation to trade in every opportunity. And, like an inexperienced batsman, they suffer the same fate. Some of the world’s best investors follow a buy and hold strategy — you should too.    
    • Missing the benefits of compounding of capital — Learn from Einstein    
    Albert Einstein is reputed to have said that compounding of capital is the 8th wonder of the world because it allows for the systematic accumulation of wealth. Even though any one in class 5 could tell you how compounding works, retail investors ignore this basic concept.

Compounding of capital can benefit you only if you leave your money uninterrupted for a long period of time. The sooner you start investing, the bigger the pool of capital you will end up with for your middle-aged and retirement years.

Don’t wait to start investing only when you have a large amount of money to put to work. Start early, even if it’s with a small amount. Watch this grow to a very large amount with the passage of time.
    • Worrying about the market – But there is no answer to your favorite question    
    Smart investors don’t worry about the direction of the market — they worry about the business prospects of the companies whose stocks they own. Retail investors are obsessed with the question “Where do you think the market will go?” This is a wrong question to ask. In fact, no one knows the answer.

The right question to ask is whether the company, whose stock you are buying, is going to be a much bigger business 10 years from now or not? Don’t take a view on the market; take a view on long-term industry trends and how you’re chosen companies can create value by exploiting these trends.
    • Timing the market — Around 99% of investors will fail in this strategy    
    It’s very difficult to time the market, i.e., be smart enough to buy at the absolute bottom and sell at the absolute top. Professionals understand that timing the market is a wasted exercise.

Retail investors always wait for that elusive best opportunity to get in or to get out. But by waiting they let great investment opportunities go by. You should use systematic or regular investment plans to make investments. You’ll have to make fewer decisions and yet can accumulate substantial wealth over time.
    • Selling in times of panic — You should be doing the opposite    
    The best opportunity to buy is when the markets are falling and there is fear in the minds of investors. Yet, many retail investors do exactly the opposite. They sell when the markets are falling and buy only when the markets are high. This way they end up losing twice – by selling low and buying high, when they should be doing exactly the opposite.

If nothing has changed about the long-term outlook for the company that you own, then you should not sell this company’s stock. Use this opportunity to buy more of the same stock in falling markets. Some of the world’s biggest fortunes were made by buying when others were selling in panic.
    • Focusing on past performance — It’s like driving forward while looking backwards    
    It is a very common perception that because a stock has done well in the past one year, it’s the best stock to invest in. Retail investors do not realize that often the best performers will under-perform the market in the future because their optimistic outlook has already been priced into the stock.

Don’t go after hot sectors that are currently producing high returns. Don’t let greed drive your investment decisions. Look forward to see whether the gains produced in the past can get repeated or not. Short-term trends of the past might not get repeated in the future.
    • Diversifying too much will kill you – Investing is all about staying alive    
    Beyond a point, having too many names in a portfolio can be counterproductive. You might end up duplicating, or end up taking too much exposure to a sector. Over-diversification can upset your portfolio, especially when you have not done enough research on all the companies you have invested in.

If you are an active investor in the stock market, maintain a manageable portfolio of 15-25 names. Instead of adding new names to this portfolio, recognize ideal ones. Then back them with more capital. In the long-run, this will produce better returns for you than adding another 20 names to your portfolio.

Investing is all is about patience and discipline. By avoiding mistakes you can improve the long-term performance of your portfolio, whatever the economic conditions prevailing in the market.
    Mediclaim vs. Health covers    
    Protection and savings    
    Mediclaim is usually a cashless policy, in which you can undergo treatment at any of the hospitals listed with the insurer without paying cash at the time of treatment. On submitting hospital bills, the designated third party administrators (TPAs) pay off the dues directly to the hospital. Newly launched health products of life insurers extend the same cashless facility. But the structuring is different. The latter, for instance, have a health cover along with the savings option. In other words, the premium you pay for health cover also has an investment element to it. The idea is to meet the growing health requirement at an older age. Premiums on health policies increase with age. At that point, savings come into play to meet their medical requirements. This could be particularly helpful for retired people as health expenses will not eat into their retirement corpus.    
    Life of the policy    
    The general insurance covers would be valid for a year requiring renewals each year, while the policies issued by life insurance companies do not require renewals till the term expires. Health policies are of a longer tenure starting up to 20 years. In case of mediclaim, the right to decline the policy renewal is in the hands of the insurer. In case of health insurance, the insurer is obligated to offer the cover till the policy expires.    
    Most life insurance companies define benefit plans. It means you know the amount you will get from the insurer for a particular treatment in advance, irrespective of the actual expenses. Let us assume you have to undergo a bypass surgery costing Rs 1.5 lakh. Under the defined plan, you may be eligible to get Rs 2 lakh. Then the insurer will pay Rs 1.5 lakh to the hospital, like a cashless product and the balance will be paid off to you. Whereas in case of mediclaim, it acts as a reimbursement plan. You have to file a claim with the TPA, who will settle the dues with the hospital directly.    
    Policy closure    
    The key difference between mediclaim and health cover is that, once you stake a claim under the latter, the entire amount under the policy is paid out and the policy closed. Under mediclaim, you can claim reimbursement till the time there is an assurance of the balance sum.    
    Health product    
    Health cover can act as an additional cover to your mediclaim.
These health covers definitely plug the gaps of the mediclaim. The defined benefit plan could be a handicap for an individual who has signed up for a less sum assured. But it could be a plus for an individual, who has signed up for an adequate sum assured. Often with a mediclaim, you may end up getting a part payment of claims for some reason. The TPA may take some time to pay off the balance. At such times, a good health cover can come to your rescue. In fact, you will know how much you will earn from your cover in advance. Similarly, your mediclaim could have caps and limits, which can be well augmented by the health cover.
    Taxes can be paid in electronic rupee, too    
    Why stand in a queue when you can pay taxes online?    

Why stand in a queue when you can pay taxes online?

Both individuals and companies are always worried about payment of taxes, when the financial year approaches its close. If you are a salaried employee, your company debits taxes from your salary. But if the tax liability still exists, you have to get a challan for your tax payments.

Hitherto, a taxpayer had to go to a bank, fill up a challan and pay his taxes at the bank branch. Now, he has an option to home or office and avoid that hot summer visit to a bank branch. Taxes can now be paid online.

National Securities Depository (NSDL) has made available an online tax payment facility via its website
To avail this facility, you would need a net banking account with the listed banks.

There are a total 23 private and public sector banks whose clients have been permitted to pay taxes online and the list is expanding. On the website, you would first have to select the relevant challan to be filled, depending on the kind of taxes are to be paid. Challan No. 280 or ITNS 280 is meant for payment of corporation tax, income tax and wealth tax, while Challan No. 281 is payment of tax deducted at source. Challan No. 282 has to be filled for other taxes like interest tax and gift tax, while fringe benefit taxes have to be paid via Challan No. 283.
On the challan, you would have to provide your permanent account number (PAN) and tax deduction and collection account number (TAN). PAN should be quoted for non-TDS payments and TAN for TDS payments. The website would then confirm PAN or TAN number with the records available with the income tax department. Once the website confirms the PAN and TAN number, the rest of the personal details would be asked for.

After all the details have been submitted, the website would ask you to give a final confirmation on the information provided. You wish to change any, you can at this stage. You do not have to go to your bank’s net banking site separately. After you confirm the details, the online tax payment website itself will divert you to the selected bank’s website.

Make sure you have the required login and password ready to open your net banking account. Here, you can mention the amount of tax to be paid. Once the payment is accepted on the online gateway, a challan counterfoil would be seen. This counterfoil contains all the details that you would require for filing your income tax returns, the deadline for which is July Make a note of the challan identification number (CIN), amount and the bank through which you have made a payment. You can also print this page and preserve it as a proof of having paid taxes online. However, there is no need to attach this challan with your income tax returns. It usually takes about a week for the challan to be actually credited. One can check the status the challan on the same website. Once you see a debit in your statement of accounts, you can be sure the payment has been made.

Some banks, like the State Bank of India, are offering cashback on tax payments online to popularize the facility. But the cash back is available only till March 31, even though the final deadline for filing returns is July 31.

Nevertheless, to avoid long queues and technical snags, the earlier the taxes are paid, the better.
    Money for a short while? Go for secured loans    

Credit cards and personal loans can be easy, but they come with a huge interest burden. If you need money for a short time, the best option is to borrow against collateral.

Consider this scenario: You need to discharge certain payments immediately, but are faced with a liquidity crunch. It’s a temporary mini-crisis and you are confident of tiding over it sooner than later, as an inflow of funds is expected in the near future. What would you do?

While swiping a credit card in a situation like this may seem to be the simplest solution, it would be wise to avoid giving in to the temptation. It is undoubtedly the most convenient option, but not necessarily a smart one, considering that the rate of interest charged is around 35-44% per annum. Similarly, the rates for personal loans range from 16-22% per annum. Now, what are the options available if you want to cushion the impact of interest outgo, in case the expected funds do not come in as per schedule? For one, you could try secured loans.
    Secured vs. Unsecured        
    The hole that servicing of secured loans would burn in your pocket would be minuscule compared to the one that a credit card is capable of creating. Owing to the fact that secured lendings such as loans against gold jewellery, overdraft against fixed deposits and stocks/MFs are sanctioned against a collateral, they are cheaper than personal loans and credit cards.

In contrast with personal loans and credit cards, secured credit options such as ODs against FDs and stocks/mutual funds attract an interest of 9-10% and 11-12.5% respectively. And this is the prime reason why more prudence needs to be exercised while choosing the mode of credit. Apart from rate of interest and repayment period, the key determinants of your decision should be the speed of disbursal and of course, urgency of your need. The minimum tenure for a personal loan is 12 months, which means that this option is effectively ruled out if you require a loan for just a couple of months.
Enumerating some of the inexpensive alternatives, Overdraft against fixed deposits and
stocks/mutual funds is a good option. Though credit card is the fastest method of getting cash, it should be used as the last resort. Secured loans are certainly most desirable and should be the first choice.

Loans against securities are flexible in nature. It also gives you the power to acquire or invest in a new rights issue without having to sell and thereby disturb your carefully built portfolio. The processing time involved in loans against stocks/MFs is 3-5 working days, after completion of the documentation procedure. Even between loans against securities and OD against FDs, he reckons that the latter is an easier alternative.

Loan against gold jewellery is another viable option. Most Indian households invest in gold and this can be used to fund your short-term needs. It is one of the cheapest borrowing avenues available today. Most banks promise hassle-free documentation and quick approval. You can borrow up to Rs 10 lakh and 80% of your ornaments’ value, and needn’t specify the purpose, unless it is for speculative/anti-social activities. Repayment period usually ranges from three to 12 months; some banks also allow you to choose between repaying the loan at maturity or through the EMI route.
    The flipside    
    If there were no chinks in the armour of secured loans, personal loans and credit cards wouldn’t have been so popular. The first obvious limitation of secured loans is that they demand a collateral.

If you do not have any assets to pledge, or are not comfortable mortgaging your prized collection of jewellery, you have no option but to turn to unsecured loans. Moreover, the limit of OD facility extended on stocks and MFs could vary with the value of the security. Hence, the borrower needs to regularly monitor the usage. Besides, the OD facility is subject to periodic review.

The deluge of warnings that you receive regarding the credit card notwithstanding, it qualifies as an excellent short-term borrowing option, provided the card holders use it judiciously and resist the urge to be swipe-happy.

They can prove to be a godsend, especially during emergencies or while traveling, but you need to strictly adhere to the discipline — including maintaining secrecy — that credit card usage necessitates.

Finally, loan-seekers would do well to remember the golden rule almost everyone is aware of, but few follow: Borrow if you think you can repay the money comfortably shortly, and always borrow within your means. Never fall in a debt trap. Secured loans constitute one method of reducing the interest burden and helping you avoid getting ensnared by the debt net.
    Do you know how your insurance premiums are calculated?    

Insurance is all about managing risks. And insurance companies don't take any risks when they are setting the rates you will pay for a policy. They want to take precautions to ensure that you won't die prematurely, causing them to pay out a lot more than you paid in.

What sort of risks are they interested in? Pretty much the same health risks doctors, medical researchers and health-conscious people are concerned about -- the same subjects you hear about over and over again if you listen to medical reports on TV or radio: tobacco use, cholesterol, being overweight, diabetes, and other conditions linked to poor health and early death.

To account for these risks, insurers will designate your status based on age, gender and health, and that will determine how much you pay for a given amount of insurance.

To determine your health status, the insurance company will ask about your medical history and most likely require you to undergo some sort of physical exam. When filling out the health questionnaire it is important that you are truthful. If you lie and the company finds out, it can cancel the policy. And if you were to die, and then the company found out you lied -- if, for instance, you said you were a non-smoker but ended up dying of lung cancer from a two-pack-a-day habit -- it could deny the death benefits.

There are some risk factors you can't control, such as gender or age. "Women live longer than men, so women have lower rates on insurance, and because men tend to have shorter life spans, they pay a lower rate on an annuity. Your age also affects the premium. Younger people, who have that much longer to pay premiums before they are likely to die, pay a lower rate than an older person would be quoted. Your family medical history, your lifestyle (do you have dangerous hobbies or travel frequently to locations where you could be exposed to disease or danger?) and your physical condition also come into play.

For most people buying most policies, the insurer will ask you to undergo a physical exam. A visiting medical practitioner, paid for by the insurance company, will check your weight, blood pressure and other vital signs, and perhaps take a blood and/or urine sample. In some cases, more extensive tests, such as an X-ray or ECG, might be required. Your blood and urine samples will be tested for any sign of disease, including the presence of the HIV virus, cholesterol level, and any indications of disorders such as diabetes, kidney problems, hepatitis and other problems. The samples will also be screened for the presence of nicotine and certain medications as well as for illegal drugs.

Each insurance company sets its own rates and determines what constitutes a preferred-plus buyer, a substandard buyer or any category in between. What if you know you have a risk factor? In the first place, alert your agent of the problem when you first talk about life insurance policies. It's likely the agent knows that some insurers charge higher rates for that risk factor than others, and he can look for a company that doesn't hike its premiums a lot for that particular condition. If it's a controllable risk factor, you can also do what your doctor or spouse might be urging you to do. Eliminate the risk factor: Quit smoking. Lose some weight. Take your blood pressure medication regularly. Get healthy.

If you substantially improve your health, you can alert the insurance company and see if it will lower your rates. There's no danger in doing this, because an insurance company will never increase the premium, but it will decrease the premium when people give evidence of improved health.

Some insurance companies will also improve an individual's rating, and trim the premium, for risk factors that decrease over time. Let us consider an example of someone who purchased life insurance shortly after a bout with cancer. That person is probably paying high-risk rates because of that health history. But, because the risk of the cancer returning decreases over the years, that individual could contact the insurer after being cancer-free for five years and might get a lower rate.

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