WHY PEOPLE ARE HAPPY WITH 4% RETURN IN AN INSURANCE PRODUCT BUT NOT HAPPY WITH 8% RETURN IN THE EQUITY MARKET..???

(Influenced by Mental accounting)

It's a general phenomena what we experience we pass on to others, like our Grandparents and parents did or have been doing.

They made investment in Insurance products & made money in their times when interest rates were very high and doing investment in insurance products was the only available option.

It has been repeatedly communicated to us by our grandparents & parents to have an Insurance policy as an Investment plan.

In the current scenario where 10 YR G-Sec Yield is 6.06 and interest rates are declining, buying Insurance policy for Investment is not at all suggestable.

People are happy with a mere return of 3-6% in Insurance products just because of two important parameters: first an illusory truth & 2nd is failure to do mental accounting.

The illusory truth effect is the tendency to believe information to be correct after repeated exposure.

It has been repeatedly saying that insurance products are safe and money is guaranteed but at the same time inflation risk and time value of money gets completely ignored by investors.

we all have a tendency to believe something is true after being exposed to it multiple times. The more times we've heard something, the truer it seems. The effect is so powerful that repetition can persuade us to believe information we know is false in the first place.

Other parameter is Mental Accounting,

it contends that individuals classify funds differently and therefore are prone to irrational decision-making in their spending and investment behavior

Mental accounting often leads people to make irrational investment decisions and behave in financially counterproductive or detrimental ways, such as funding a low-interest savings account while carrying large credit card balances.

Like,when an Investor buys any insurance plan he makes his mind that he will receive 4 % return but if the same money is invested by him in Equity which gives a approx 8% to 12 % doesn't attract him,which is not only 4% extra but it is 100% extra return because of unable to do mental accounting person unable to differentiate.

Above said thing is a classic example of failure to do Mental accounting.

People tend to experience the mental accounting bias in investing.For instance, many investors divide their assets between safe portfolios and speculative Portfolio. They think they can prevent negative returns from speculative investments from impacting the total portfolio. In this case, the difference in net wealth is zero, regardless of whether the investor holds multiple portfolios or one larger portfolio. The only discrepancy in these two situations is the amount of time and effort the investor takes to separate out the portfolios from one another.

Another classic example Mental accounting is unable to differentiate CAGR return, With 20% CAGR, 1 Lac takes 3.6 Year to become 2 Lac, takes 13 Years to become 10 Lac and 26 Years to become 1 Cr from 1 Lac.

Surprisingly,investors take Traditional Insurance for 20 Years but do not remain invested in equity for 20 Years.

“Think Equity-Think Beyond”

Regards

Amit Bhati
9509514730
amit@fundspru.com
www.fundspru.com