Thursday, August 20, 2015

Double your money - LOL

Recently, I came across an advertisement by a real estate company highlighting 33.33% annualized return on investment in their property. The tagline read: “Why ______________ double your investment offer is the best investment option”. It showed a table comparing various avenues:
Comparison against investment options
Investment option
Average annual rate of return
No. of years required to double investment
Risk of investment
Double your investment offer
Equity / stocks
17% *
Mutual funds
Fixed deposits
* Average returns for investing in stocks over the last 3 year period. Risk involves price fluctuations and volatility
(The above table is reproduced from the advertisement that appeared in leading dailies)
What an offer! Looks mouthwatering!
A word of caution may be required here. (In fact, many words may be required).
Let us start with the fine print here. The advertisement has an asterisk (*) mark against the 17% shown in front of equity/stocks. The note below the table says “… Risk involves price fluctuations and volatility.”
“Volatility” of what? One may be referring to volatile prices or volatile returns. Incidentally, volatile returns are a result of volatile prices. And volatile prices and price fluctuations indicate the same thing.
Let us now come to the table. In the second column, average annual return numbers are mentioned for four different investment options. Whereas the returns in case of equity/stocks are the average for the last three years, there is no mention of where the same for mutual funds is taken from. The range of returns indicated here (8 – 10%) simply suggests that almost all mutual funds offer very similar returns, which further means there is only one category called mutual fund and there is no difference among various schemes of mutual funds.
Further in the second column, the “Double your investment offer” is expected to give 33.3% annualized return. 33.3% multiplied by 3 would give you 100% in 3 years – exactly what the advertisement claims. So far so good, but the moment you analyse the numbers in the third column, another error props out.
“Double your investment offer” doubles your money in 3 years and hence the returns are mentioned as 33.3%. In that case, if a fixed deposit doubles your money in 8 years, its returns should be mentioned as 12.5% and not 9% (12.5 X 8 = 100, whereas 9 X 8 = 72). This is where one can make out that the copywriter does not understand the difference between simple interest and compound interest. Or is it convenient to make the mistake here? If you use simple interest in one case, why should you use compound interest calculation in another, within the same table?
The final column is the most interesting – risk. What is the basis of concluding whether an investment carries high risk or low risk? Incidentally, if we look at the mutual fund row, once again the myth (that all mutual funds are the same) shouts loudly. How can the risk of all mutual funds be mentioned as “medium”? If that is the case, why did SEBI introduce the “Riskometer” recently?
What is the basis of mentioning that “Double your investment offer” is “low risk”? Is it because someone guarantees buy-back at double the price? Does it mean there is no price fluctuation since someone guarantees? If that is so, ever heard of “credit risk”? What if the guarantor cannot honour the guarantee? What if the guarantor does not?
Ok, ok, I know you would still be holding the property. Really? Or would you only be holding a property “under construction”?
Be careful. The money invested would be yours. It is always better to be prudent and not get swayed by advertisements that promise the moon. Someone has rightly said, “If it sounds too good to be true, it probably is.”
Exercise due diligence. Check all the claims made. Only after satisfying your doubts, go ahead an invest your money.
One more point: there are investment avenues and issuers that fall within the ambit of various regulations and there are some that do not. Real estate is one such area that does not have a regulator. In all such cases where a regulator does not exist, you got to be more careful.

1 comment:

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