Chasing high returns can be a recipe for disaster

How often you come across items like these: Top 10 hot stocks to hold; Top stocks for gains; How to double your money; The top 5 mutual funds to invest in...

How often you come across items like these: Top 10 hot stocks to hold; Top stocks for gains; How to double your money; The top 5 mutual funds to invest in… The list goes on and on. Your mind suddenly goes into a tizzy and you start calculating the notional gain/loss. The number of zeros following the number sets your pulse racing and in this state of delirium,you take the decision to invest.

This phenomenon is the depiction of above-average or high monetary returns that causes excitement and sufficient justification (behavioural) for decision-making. We see this day in and day out and still are not able to stay from this.

Typically,your financial adviser or your bank relationship manager introduces you to a recently introduced product which,based on the stock market movement,offers you a return that would vary between 15% and 31%. You suddenly start assuming and calculating the return at 31%. A smart,savvy presentation,the right use of words,the promise of high returns and,yes,you are hooked. You desperately want this return that you ignore to ask as to what would happen if the strategy of the fund manager fails. You have already been sucked into the product.

How to stay away

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Headlines: Any headline with words hot,now,double warrant a second,careful look,a second look to warrant if there needs to be an investment in this financial product.

Greed along with fear is one of the primary reason for succumbing to this. In the current economic scenario,if the fixed-income instrument is offering a return exceeding 9%,the economy ideally is not in great shape. And so,when you are introduced to a product that offers returns in high double digits,you succumb. Look at compelling reasons to invest and only after your logical part of the brain gives a go-ahead should you take it forward.

Guarantee:

This is another word you should stay away from. Ideally,there can be only two guarantees: Taxes (where you have no other option but to pay one) and death. (Lets not include the bank or post office fixed deposit and the interest rate in this definition of guarantee.) Whenever a guarantee is promised,there is a catch. Ask what the catch is that makes the returns guaranteed.

Past performance:

Past performance is history. In fact,a mutual funds prospectus will always have the disclaimer mandated by Sebi: Past performance is not an indication of future performance. If the management of the company and the fund manager is not nimble enough to adapt to the prevailing economic environment,investment based on past performance again is delusion and can cause more pain than gain.

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Understand and then invest: When you undertake any investment like buying a house,shares or bonds,you must try to understand the nature of the product,whether the returns are market related or market agnostic. Whether it is fixed income,equity or hybrid. Whether the investment strategy is short-term or long-term,and whether the investment generates income and helps in wealth creation. Also,find whether your capital is protected; if not,it merits a revisit.

With the explosion of the information age,all kinds of information are available. It is your prerogative to choose what is best for your financial health. Chasing high returns is a perfect recipe for disaster. Try to understand the product well and when in doubt,sleep over it for the next 24 hours and then take a fresh call. The adage buyer beware was never so true as it is today.

The writer is founder and managing partner,Zeus WealthWays LLP