Sure V/s Stupid.
Let’s play a small game. You have two choices. Give me Rs. 1,00,000 every year for 20 years and at the end of 20 years, I will return Rs. 40,00,000 back.
OR,
Invest Rs. 1,00,000 each year for 20 years at 8%.
You have to answer this question without going into calculations.
Sometimes, we weigh an option that shows absolute result much higher than the option that shows a relative result. A directly calculated number puts more impact on our minds than some percentage based calculation.
This is the classic case with endowment plans or ULIPs offered by bank and insurance companies. These companies would never dare to talk about the returns in terms of percentage that a product would generate for investor simply because it would never sell if the customer knows the actual return.
The selling point has always been “Guaranteed Returns”, “Assured Bonus”, “Money Back Plan” and all the other fancy names that makes an investor emotional and gets him into the trap.
Not that all such products are completely useless, Some products do offer benefits in cases where the returns become more tax efficient and are not linked to market. However, most of the products simply don’t make sense at all.
Alas, they do make sense because, we, the humans, are always attracted to the exact numbers rather than relative numbers.
In the above question, the second choice would yield around Rs. 45,00,000 even though 8% return seemed to be a bad preposition.
Moral of the story:
“Take your time in analyzing the return generated by a certain product in percentage terms. One should also not ignore the lock-in period of such products along with term & conditions of withdrawal.”
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