Mental Maths
Your mind plays games in such ways that you start believing you are paying nothing, but are getting a lot
The Problem
It gets fuzzy when you start thinking about money and risk in the same breath. People tend to be shortsighted with money because they feel that they have got it all calculated in their heads. Not everyone is endowed with mental maths to know how much returns they will earn from an investment based on few other factors. Instead of using real calculations, one goes with assumptions that skew the real value of money. The success of various Ponzi schemes is a classic example of how many people tend to believe they are earning a higher return, without realising the associated risks. The eternal chase to double investments, takes away all conversations around returns and the time taken to double the money. The Kisan Vikas Patra doubles money, but it takes over nine years to get there!
Example
It is common for people to put money in chit funds, bank deposits and recurring deposits, because these instruments clearly indicate the maturity value. The same is not possible when investing in mutual funds or equities, resulting in investors shying off them, because of their prejudice with mental maths.
Suggested intervention
First things first, learn to use a few basic financial functions in a spreadsheet. Next, understand the difference between simple and compound interest. Finally, the difference between annualised returns, point-to-point returns and inflation-adjusted returns should be well understood and applied every time you are about to make an investment decision. Your mind should understand how the product will work and operate than get into analysing returns, which will not only be time consuming if you don’t have the flair, but will also throw up wrong figures, based on which you will make decisions.
Tip
Risk and return are two sides of a coin. Do not be misguided by seeing only one side of the coin, without realising the impact of the other side. More important, learn how to use a calculator on your phone to get the basic returns calculated correctly.
Read: Inside the Mind of Investors
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