A Strategy in Financial Products: Keep It Simple Stupid
“Keep it Simple Stupid” phrase is mostly used in Management Books where it is taught that the simpler the solution would be, the more effective it will have. Management is nothing but techniques that should be used in day-to-day life. Even in the case of Financial Matters, this rule of Management applies.
There is a very famous quote from Warren Buffett, “An Investor needs to do very few things right, as long as he or she avoids big mistakes.” point what we are trying to make is that investor/user of Financial Products tries too hard to get the best and in doing so, he actually makes a mess and then blames the same on other factors may it be marketing, cheating by intermediary/agent etc.
Financial Products, we have a long-term horizon, may it be Investment, Insurance Policy, Mediclaim, Bank Accounts etc. These products by their intrinsic nature are not complex and are simple to understand.
Real Life
In real life, the story is altogether different. People generally buy a life insurance policy which the agent pushes on them by using complex maths. This investment is either done in Government Bonds in case of Traditional Policies and if it is a ULIP plan, then it would have some Equity-based investment.
Users of Financial Products such as Insurance, Investments, etc are sold what is complicated so that more money could be made by the agents and the manufacturer of the product. How many agents would advise you to go for PPF with term insurance rather than an Endowment Policy? The former is plain and simple and the latter is complex, opaque, and costly as well.
Why after banning on Entry Load in Mutual Fund, many agents start selling Structured Products, close-ended & NFO funds from Mutual Fund Companies or Highest NAV Guaranteed Plans from Insurance Companies? No prize for the answer.
When you deal with simple products, not only the intermediary cost is less, but even manufacturers have lower margins.
Let me end today’s blog with the question that arises here is your agent won’t love to sell you such simple and effective products?
And ……
- KISS for Investor :
He must buy plain vanilla products and keep the investment profile simple.
In Insurance, one should go for Term plan in life insurance, an Accidental policy for Accidental coverage and mediclaim policy for Hospitalization risk. One must totally avoid any investment linked to Insurance. Remember Insurance is an Expense and not an Investment.
In Investments, one should have a PPF account, Investment in government bonds & Mutual Funds. One should avoid fancy products and so-called FLAVOUR OF THE SEASON.