We have learnt and most importantly unlearn a lot of financial truths over a very recent small period of time. A lot of financial mistakes were made; rectified and right course was sought. I have written about frugal life a bit but this post is focused on financial decision and not saving percentages.
Let’s start with our financial mistakes:
Both of us pride ourselves on our researching capabilities so it was very humiliating to realize what a fool we have been for last 5+ years. Seriously I have been kicking myself a lot lately. If you have ever thought, that the option before you is quite comfortable and will take away a lot of work; STOP and research it’s real cost to you. We realized if we hadn’t course corrected we would be donating pay checks at one financial service provider or the other. Paying out of our pockets simply because we did not know what options we had is not just stupidity it’s financial suicide.
Did you know that there is an option to buy mutual funds directly from the AMC which run the fund and not through DEMAT providers, distributors and advisors. It might not have been a very easy thing to do earlier but over past few weeks since we invested in our very first index fund we realized we had been paying a huge variety of fee. This is definitely not a variety I like especially since it can be resolved with nothing but a few minutes of your time. Here’s a brief view of varied fee you would typically pay for a single mutual fund transaction over and above the actual comission.
Transaction fee: varies from 100-150 Rs for lumpsum purchase and 30Rs.-1.5% for SIPs. A few providers don’t charge you anything once you rice above a certain threshold. Here’s an example from ICICI.
Service Tax: yup you pay additional tax on the fee that you are charged to buy the fund through the service provider.
Commissions/higher expense ratio
If you buy through any agent you are liable to pay a commission, but most of us believe it is a onetime commission paid when you buy or sell. Now this is where we are wrong, most DEMAT providers get trailing commissions. In short as long as you hold the fund you bought through them they are getting a commission. If you do use the personal advisor or other such facilities there might be a good reason why you would not feel bad about parting with your money.
We on the other hand were always involved in our own researches though not always the right criterion were used but we knew what we wanted to buy and for how much. W paying so many fees just feels wrong.
Not investing in Direct funds
I had no clue that there was an option to buy mutual funds under direct scheme. This means that you are buying directly from the AMC and are therefore not required to pay for a distributor’s cut. Remember we did our own research and just used the Demat account as an easy place to buy funds this option would have saved us a lot of money.
For example in the clip below from OROWealth the saving vs. regular is the difference between buying a regular vs direct mutual fund.
If you are confused as to how much of a difference this would make imagine loosing 2250/- for every lac you invest every year. If your investment funds in 10s of lacs or is above 1 cr the fee becomes significant. Money lost on a fund of 7lac in a year is currently more than what we spend per month. I don’t see the point of missing out one month’s sustenance every year.
Buying wrong funds
There are so many ways of saving tax and tax saver mutual funds are one of them. I thought they are the best ever tax instrument since you get a good rebate while you buy a mutual fund. Now I know that is not the case, why you ask. Remember the fee I talked about, they are too high for the tax shield/saver funds. Also PPF is one of the better ways to save tax and diversify your investments, which I will discuss a bit later.
I am sure you would have guessed who I bought those finds through.
Listening to advisors even those who call themselves your friends
Like someone said yesterday over at MMM forum no good deed goes unpunished I trusted a friend and found out I was a fool. He might not have started off with the intention of giving me shoddy advice but that is actually what he did, and all of that for some commission. Needless to say, I won’t be taking advice from someone any time sooner. It is quite possible, that he really believed in the product he sold to me around 5 years ago. I have learnt to research the hell out of suggestions after dubious results from following the suggestions of someone who was a trusted colleague and an advisor.
The biggest mistake ever
I love shoes and am not ashamed to say so. When I started working I would buy shoes every week thankfully I could not buy them full price yet so I took advantage of sales all around us. Mr. S on the other hand would not spend a penny if he did not have to. Result was he had over a lac saved in first year of our jobs and I had barely a few thousands. I was almost always in debt, only the lender would usually be my then boyfriend now husband. This did not change till we began travelling more and more. Now every shoe I bought was a night in a faraway place I was dying to visit.
The biggest change in our money outlook happened when we were moved to the expensive city. With rent three times of what we were paying in the previous city, higher taxes on every shit and no real raise we had to do something or else we would have never been able to equate our loan*. In fact we would have been eating from our savings very shortly.
Had we taken the approach we now have to our finances and running our life we would have definitely been far closer to our goal.
*We equated our loan but rerunning our calculations made us realize there is a much better way of using the money. I will probably write a post about it soon