One of the stupidest things I have seen people do while creating wealth is interrupting the compounding. When a person invests in mutual funds, unit linked policies, national savings certificate, ppf, direct equity, …et al it is fairly obvious that they will break something.
Now if you suddenly need Rs. 2-3 lakhs from a portfolio of Rs. 75 lakhs – what do you do? Well you see which is the easiest to break. Simple.
Now for a person with such a small requirement, it may make a lot of sense to borrow from a bank – and repay the loan in 3-4 months. Or borrow against a life insurance policy (LIC gives you money @ 9% p.a.) and let LIC set it off against the accumulation of the plan at the time of policy maturity. Even better if the ppf account is more than 7 years old, you will be allowed to withdraw some amount of money from that account also.
However like all their investments, their withdrawal – Rs. 3 lakhs or Rs. 30 lakhs is withdrawn from the EASIEST place to withdraw. This is normally the mutual fund. While selling a mutual fund SIP the mutual fund adviser tells the customer – it is all right to withdraw, it is all right to skip one month, etc. Now these are FEATURES, but most customers do not understand what they are doing….and make a mess of their total portfolio.
So if you see why an ‘investor’ does not make as much money as the fund value..it is because most of them INTERRUPT compounding. This is one of the STUPIDEST things to do in a FAST compounding asset – especially if the asset allocation was scientifically done.
But it is common….reactions from ADVISORS welcome! I have too many customers reacting..want some adviser’s feedback please 🙂
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