Recently there was an article in the newspaper titled Mixing Life Insurance with Investment is a Common Mistake. It was published in a column titled “OOPS! Mistakes Investors Make” in Business Standard 2 August 2018. the article written by Kayezad Adajana explains the view point of Maher Dhamodiwala, who we are told is the founder of Financial Artists, a Mumbai-based financial planning firm. This article is a good example of how biased information gets publicity in the media. I wish if not Kayezad Adajana, at least Business Standard will work to maintain their reputation as an unbiased, professional and balanced newspaper.

Firstly we are not told why Dhamodiwala’s views are so important as a stand alone view point. Who is Dhamodiwala, apart from founding a rather awkwardly named and unheard-of organisation called Financial Artists, we do not know.

Secondly we are told in very strong language that investors make mistakes of many types. some of the examples given are: buying life insurance as a savings product, buying too many mutual fund schemes, buying property and so on. In the same breadth the article talks of portfolio development. Both the author of the article and the views of the founder of Financial Artists display a high degree of ignorance of the the subject of finance. A portfolio by definition is supposed to contain investments of varying risk-return investments. In that portfolio life insurance endowment and mutual funds both have a role. So does property, though investments in physical products is not a subject of this article. The mistake, Mssrs. Adajana and Dhamodiwala is that your article is very confusing and does not tell the reader why mixing life insurance with investment is a mistake or why having too many mutual fund schemes is a mistake. The article just presupposes that an argument existing in your mind is obvious to all readers. And when the reasons are articulated in print they will sound unconvincing.

High Risk Investments Do Not Always Get High Returns

It is a known fact that about 90 % of all investments made by Indians are in low risk (mind you not low returns) investments such as banks, life insurance, provident fund, pension funds, postal savings, etc. Click here for RBI data on this point . Most of the financial analysts mix up the concepts of risk and return. It is usually told to gullible investors that if they want high returns they should invest in higher risk investments. Nothing could be farther from the truth. Volatility of returns in high risk investments wipe out most of the high expected returns. There are many instances where investment in low risk investment gives higher return in the long run. Read And the Tortoise Wins to get a idea of how this can happen.

Traditional life insurance endowment is one of the best investments that a person can make for the long term. A steady return over a long period of time is financially a better proposition than volatile investments over the same period. This is a fundamental lesson that financial planners conveniently forget. instead they project returns in a particular year or period when the high risk investments were giving high returns and extrapolate the returns to a longer period to show how the investment will give high returns in the long run. Recently I came across a projection where the financial planner projected a 12 % return each year for 20 years, giving a return of 9.65 times the original investment. What this means is that the financial planner believes that if you invest Rs. 100,000 today you will get Rs. 9,65,000 after 20 years! Gullible investors fall for such statements and by the time they realize, they would have lost all their money.

Be Proud

All life insurance sales persons should be proud that they do not commit such fraud and are selling traditional life insurance in the best interests of their customers. Keeping customers money safe is perhaps a more important objective than trying for a mirage called high returns. Customers also believe in this, which is why 90 % of their investments are in low risk investments. In selling life insurance we are in alignment with the market.