Empower Yourself With Financial Literacy To Avoid Investing in Wrong Financial Products

To which I replied, "Yes aunty, if you are willing to make an investment that will save you money on taxes, you should first evaluate your risk tolerance and investment goals. If you can tolerate the risk of investing in equity-oriented mutual funds and have a long-term investment horizon of at least 5-7 years, tax-saving mutual funds or ELSS are a sensible choice."

She replied, "That sound's like a perfect solution for my tax saving requirement. I wish I could be able to choose such worthy investment options and not fall into investing in the wrong ones."

To which I responded, "The major reason behind any investor investing in a wrong financial product is due to lack of financial literacy. It is essential to understand the features of a financial product and it's suitability with your risk profile, investment horizon and objectives." This article elucidates how you can empower yourself with financial literacy to avoid investing in wrong financial products.

The lack of financial understanding may underscore the struggle with saving and investing that many of you are grappling with. From budgeting to personal financial management, financial literacy is the ability to understand and apply various financial skills.

Financial literacy is the enhances your capability to use knowledge and skills to manage financial resources effectively for your financial wellbeing. Major financial decisions like opening the suitable bank accounts, planning for retirement, paying off personal debt from loans or credit cards, and developing a strong investment portfolio for wealth creation are difficult to make when one lacks financial literacy.

There was a time in India when financial education was restricted to the financial shelf in bookstores. Today, the game has changed largely due to internet penetration and the availability of affordable data, leading a whole new group of consumers to the digital economy. Retail participation in the Indian markets has also increased dramatically over the past few years.

Due to lack of financial knowledge regarding the viability of various investment avenues, investors frequently experience a confusion while making investments. If these problems are not tackled initially, they could lead to a flawed investment decision, which can prove disastrous for your finances. Financial literacy assists you to be financially conscious and make prudent investment decisions after analysing the dynamic market conditions.

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The smartest approach to manage your hard-earned money is to become informed about your investments. Financial literacy is the starting point for building long-term wealth. Financial literacy and maintaining control over your investments help protect your portfolio from needless losses, it brings financial piece of mind and keeps you in pink of your financial health.

Some financial challenges might be out of your control, such as the recent uncertainties imposed by the COVID-19 pandemic. However, sound financial planning can equip you to weather the storms that comes your way. Financial literacy assists you to be prepared for unforeseen events and empowers you to make wise financial decisions.

So how do you become financially literate? 

The first step toward securing your financial future is arming yourself with the sword of financial knowledge, which entails learning the fundamentals of personal finance, such as budgeting, debt management, and, of course, savings and investments. Financial literacy builds the foundation of an individual's relationship with money and how you could strategically build your wealth over the years by effective financial planning.

There are various ways to improve your financial literacy. However, the expansion of technology with fintech in the finance field has resulted in the creation of financial e-course, several financial apps and money management tools that could be an excellent solution, to strengthen your financial understanding and instil money management skills.

Financial literacy courses provide top-notch information, and many times they are interactive. Many institutions are providing e-courses that are customised for Indian consumers; they are well-researched and objective. You need to select an effective financial e-course that helps you understand the nuances of financial planning.

I would suggest you enrol to PersonalFN's exclusive new certificate e-course, the "Certified Family Guardian". This e-course is truly empowering separated into eight modules with 24 extensive videos, that enhance your financial literacy and assist you to become your own financial planner with the help of its premium tools. You can equip yourself with financial knowledge under this course and be your family's financial guardian that makes informed financial decisions for a secure financial future.

Financial e-courses allow you to enhance your financial literacy from the convenience of your own home, giving you the freedom to balance your work and devote time to improving your financial knowledge.

How financial literacy will assist you to avoid wrong financial products?

1. Draw a financial roadmap

Before you make any investment decision, sit down and take an honest look at your entire financial situation especially if you've never made a financial plan before. The first step to successful investing is defining your financial goals and risk tolerance either on your own or with the help of a financial professional.

Financial literacy will help you draw an effective financial roadmap as per your suitability which will prevent you from making dubious investment decisions. It will also assist you to align your investments to your S.M.A.R.T financial goals.

2. Asses your risk profile

All investments involve some degree of risk. If you intend to purchase securities - such as stocks, bonds, or mutual funds - it's important that you understand the risk involved in various investment avenues before you invest.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to invest in asset classes with high risk, like equities, rather than restricting your investments to low-risk assets. However, if you are financially literate you could asses your risk profile wisely and invest in products that match your risk profile. This will assist you to avoid investment in high risk financial products that may affect your financial well-being.

3. Invest in worthy avenues

When it comes to investing, you need to analyse various features of the investment product. You should not rely only on the past returns or any suggestion from your friends or relatives. You need to conduct a thorough research and analyse various quantitative and qualitative parameters such as the credibility of the fund house etc.

You may consider to invest in worthy avenues that offers risk-adjusted returns taking into consideration the effect of rising inflation. Financial literacy will enable you to consider these qualitative and quantitative factors before investing and make worthwhile decisions based on your suitability.

4. Aim for an appropriate mix of investments

An investor should aim to build an 'all-weather' portfolio by including various asset class, as they offer diversification and assist you to survives the tides of high market volatility. Historically, the returns of the three major asset categories - equity, debt, and gold have not moved in the same direction under any market conditions.

One asset category may perform well as a result of shifts in the market's dynamic conditions, whereas another asset category may perform poorly or averagely. You can lower the concentration risk associated with investing in a single asset class by diversifying your investment across multiple asset classes. If the investment return for one asset category declines, you will be able to offset your losses in that asset class with higher investment returns from another asset class. For instance, your debt investments will aid in stabilising your portfolio returns if your equity investments are experiencing high market volatility.

In addition, asset allocation is important because it has major impact on whether you will meet your financial goal. Thus, financial literacy will help you understand the value of portfolio diversification and how you should invest in worthy asset classes.

5. Become your own financial planner

Most Indians avoid paying for proper investment advice to a finance professional. Sometimes the service fees are expensive and it gets difficult for an investor to manage the finances with such fees and the rising prices of essential goods. This leads to DIY investing and due to lack of financial literacy many investors end up investing in wrong financial products.

You can easily become your own financial planner if your arm yourself with financial knowledge. Being your own financial planner eliminates the lack of transparency and ensures that you know where your hard-earned money is going. You could also confidently select and invest in mutual funds through a direct plan, which eliminates the need for an intermediary and allows you to buy mutual fund units directly from the fund house.

However, if you wish to invest though your financial advisor, financial literacy will help you ask precise question regarding your investments. This will give you an idea of how your portfolio is performing and further you could discuss with your financial advisor how to invest in worthy avenues as per your suitability rather than simply rely on advisor's decisions. As a result, managing your investments effectively and making wise financial decisions takes considerable time, expertise, and ongoing effort; it's not a one-time thing. You can't become a financial planner in a day or two.

Therefore, the more work you put into improving your financial knowledge, the more you will become a better planner and manager of your own money. So the solution is to look for a reliable source of financial information and to keep your financial knowledge up to date. Financial literacy will help maintain a secure financial future and prevent you from investing in wrong financial products.

PS: We at PersonalFN understand that not everyone holds deep financial knowledge. Here we encourage you to gain and enhance your financial knowledge and become a 'Financial Guardian' to your family. You will understand the financial planning elements to become your financial planner.

And in case you are wondering how to become that financial guardian for your family, PersonalFN's latest unique initiative, the "Certified Family Guardian," offers you an exclusive opportunity to learn the finer nuances of money management.

So, if you wish to be financially literate and avoid investing in wrong financial products, you must enrol for the "Certified Family Guardian" programme today!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst