All the returns in the world cannot beat the safety traditional investments provide women. But the price to pay for this safety is not building wealth. And that is indeed a high price to pay.
Sasha, 34, has been diligently investing for the last 10 years. Like most people, she was guided by her parents when she started working. Their advice was to buy investment-linked insurance plans as they provided tax benefits and gold for a secure future. Sasha got a shock when she tried to exit both investments to pay for the down payment on a house. The amount she was getting back from the policy was 70 percent of what she had invested and on the gold, there was a 10 percent deduction.
Gold doesn’t always glitter
For decades, women have been investing in gold and feeling good about the absolute price increase but they do not realise the costs involved in buying and selling gold jewellery. While buying it, 30 percent goes into wastage and making charges, and while selling, 5-10 percent is deducted. Thus the making cost while buying gold ornaments amounts to 40 percent. This is even worse for diamonds, whose resale value is not good.
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Another scheme that is very popular these days is gold jewellery schemes. In these schemes, the investor contributes for a certain number of months and the jeweller contributes for one month. At the end of the tenure, the investor can buy jewellery from the same jeweller for the accumulated corpus. While the investor looks at this as a deposit, it is essentially a short-term working capital funding mechanism for the jeweller.
These schemes are not regulated by any regulator. This is because the deposits made are shown as an advance purchase of jewellery. If the jeweller vanishes, the investor has no recourse and/or grievance mechanism. Further, the accumulated corpus can be used to purchase only gold jewellery but not gold coins or bars. It also cannot be withdrawn in case of any emergencies.
With such high costs of physical gold and gold jewellery deposit schemes not being regulated, it is better to only buy jewellery that is worn and move the investment portion to sovereign gold bonds (SGB). SGBs have no cost and are tax efficient since they provide tax-free returns at maturity (8 years). They are listed on the stock exchange and can be exited if required. They are issued by the government of India and hence have no credit risk. A government-issued bond with no cost or something with 40 percent cost and huge credit risk — the scales clearly tilt in favour of SGBs.
Insurance is not an investment
It is time to move on from the guaranteed return mindset to market-linked returns. The returns in gold and insurance policies are actually market linked. They are just perceived as safe investments because of the way they are sold by the agents.
Insurance account statements are also difficult to decipher and investors seldom calculate returns from policies or check for the expense ratio. Due to high costs, investment linked insurance plans return 4-5 percent per annum, which doesn’t beat inflation, and a premature exit means getting back less capital.
A better alternative
A better alternative to these plans is balanced advantage funds. These funds invest in stocks and bonds and change the allocation based on various parameters linked to market performance. These funds work well as they take care of asset allocation and rebalancing, aspects that investors find difficult to do themselves. With mutual fund expense ratios being capped, the costs in balanced advantage funds are much lower than in insurance schemes, resulting in better returns for the investor.
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This International Women’s Day, I would exhort all women to move out of their comfort zone on investments and move into tax-efficient, inflation-beating investments if they want to build wealth.
Happy Women’s Day!
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