Be an informed investor in 2021

The year 2020 will not be forgotten for a long time probably not in our lifetime. A once in a century pandemic, which impacted millions across the world financially, 2020 was the year people started looking at their finances more carefully and did more transactions digitally than before. Investors also relied a lot on digital mediums for financial advice.  But is this “advice” enough to make the right financial decisions? Probably not!

TikTok, YouTube, and other social media platforms have hundreds of content creators, who make videos on their personal experiences with money management. They speak on a variety of topics ranging from loans to investing in options and cryptocurrency to taxes.

The problem is that these are looked upon as solutions to navigate one’s financial life by the public. What they forget is that these entertainment sites with short videos cannot help you manage finances. Further, a social media influencer’s experience may not work out for others or in the long term. There is a lot of dubious advice too, from people unconnected with the finance world. Sample some of the advice given – buy airline stocks or take multiple cards, max out one, and then pay for it from the others.

Money has a different meaning for each person and the behavioural aspects of the following financial advice differ. An investor may buy value stocks, going by an influencer’s TikTok video but does he/she have the ability to figure out how long to hold and how these stocks tie in with financial goals?

Indians tend to rely on family & friends for choosing investments and are now looking at videos by chartered accounts, DIY investors, and financial advisors for the same. Most videos are product specific and do not explain how the product will affect a person’s financial plan. This content is mainly consumed by investors searching for the “best investment option” to make a quick buck. That’s why there are so many videos on stock IPOs & mutual fund NFOs.

Being an informed investor means having good knowledge of investment actions. Informed investors read and gather information about financial instruments before investing in them.

Informed investors do a deeper analysis of a product much beyond than enquiring about the expected returns. They find out how a product makes money, the timeframe required to do so, and the fees apart from the risk involved. They also evaluate how the product fits into their financial plan and what factors can impact returns. I don’t find investors asking these questions or getting into a detailed analysis of an investment product as they would do if they had to buy a gadget. Peter Lynch famously said “Spend at least as much time researching a stock as you would choosing a refrigerator”.

There are many ways to gather information on financial products. The offer document and fund fact sheets(for mutual funds) are a good source. These contain information about the company floating the financial instrument, the working of the product, and the risk factors in the product.

I recently came across a gold product promising a 10% return and on checking the offer document, I found that this was being offered by an NBFC and the payment of the 10% interest was linked to repayment of gold loans disbursed by the NBFC.  Clearly, the risk in this gold product was much higher than a fixed deposit.

I always recommend investors to read the personal finance columns published in print and electronic media by reputed media companies. Personal finance shows on TV channels are a good source too but investors should note that these shows can only provide limited information and investors would still need to study the basics.

The same holds true for personal finance blogs and youtube videos. A good blog/ video should give offer a balanced view and most certainly needs to talk from a financial planning perspective.

Benjamin Franklin said, “An investment in knowledge pays the best interest”. Without knowledge, the action is useless and knowledge without action is futile.

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Photo Credit: Deccanherald

Source: Article written by Mrin Agarwal in Deccan Herald

Originally published on: 28 Dec 2020

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