Should Youngsters Look Up To Their Parent For Investment Advice?
Jun 20, 2019

Author: Divya Grover

(Image source: Image by rawpixel from Pixabay )

Parents like to be involved in every decision their children make, even after they've become adults and have started earning.

Indian parents believe that their knowledge and experience can guide you in life, career, and investment decisions.

Though they always have your best interest at heart, their investment knowledge may be limited. Even if the advice is good, it may not necessarily be suitable for you.

Let's face it, our parents grew up in the age when there were not too many investment options available and financial literacy was not widespread. The popular, default investment options for most were bank savings and fixed deposits because these were considered safe avenues. Investing in stocks and mutual funds was seen akin to gambling and an investment option only for risk takers.

As they were risk averse, naturally your parents want you to take the safe investment route and to not lose any money with risky decisions. If you ask your parents for investment advice, they will advise you to park your money in safer avenues like bank deposits (saving, fixed deposit, and recurring deposit), national saving certificates (NSC), and provident fund (PF).

It is true that bank deposits, NSC, and PPF are safer investment option and they can provide stable returns. However, these investments do not have the wealth-building potential like mutual funds and other avenues. Also, these investments cannot be customised to suit your financial needs and goals.

If your parents have always been averse to the idea of investing in stocks and mutual funds, it is possible that you too may have apprehensions regarding it. However, the risk related to investing in stocks can be mitigated if you invest through mutual funds.

If you wish to achieve capital appreciation and generate inflation-beating returns, equity mutual funds is a must have in your portfolio. On other hand, debt funds can provide a better alternative to fixed deposits and also enable portfolio diversification.

As you are young, you have a longer investment horizon and hence you can afford to take some risk. Mutual fund allows a higher level of customisation so that you can select scheme as per your needs. With mutual funds, you can also invest regularly through systematic investment plan (SIP) which will give you better returns by averaging the cost and compounding the returns over a period of time.

If you carefully select mutual funds after evaluating the quantitative and qualitative parameters and stay invested for the long-term, it can provide higher returns than any other investment avenues.

Many parents own endowment policies which are generally advocated as the scheme having the dual benefit of investment and insurance by the people who sell them. In reality, an endowment policy is neither a good investment option nor does it provide adequate insurance. So if your parents tell you to invest in such policies, explain to them why this option should be clearly avoided.

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Apart from this, they are likely to encourage you to invest a certain amount in gold, to provide liquidity during bad times, and, if you are earning well enough, real estate.

It might be hard to make your parents understand, but gold is not a good investment. Investing in gold is not advisable as its returns have not been attractive enough. If you still want to invest in gold, it can form a small part of your investment portfolio. You could also consider investing in gold ETFs/mutual funds.

If you invest in real estate, you will have to avail of loans with high interest rates. Besides, there is also the risk that the value of the property will not appreciate in the future. Before investing in real estate, think carefully about your career and financial circumstances and whether you will be able to afford the EMIs for 10 years or more.

[Read: Are Your Spending Habits Influencing Your Children?]

Some parents who understood the importance and benefits of investing in wealth-creating avenues like equities invested in stocks and mutual funds early in life, and they have germinated this notion in their children as well.

Nowadays, there are many investment options for young investors to choose from. Many financial advisory websites that work towards investor awareness and portals that provide financial planning tools are available online for free. These can help you understand your financial needs and help to build an investment portfolio accordingly.

This could have a far better effect on your financial health compared to the advice from parents, relatives, or friends.

Here are the financial products you should own for your financial wellbeing:

  • Equity and debt mutual funds for your various short-term and long-term goals.

  • Bank fixed deposit, PF and other traditional investment for capital protection.

  • Bank savings, liquid/overnight and short-term debt funds to park contingency reserves.

  • Term insurance to protect your family against unforeseen events.

  • Health insurance for you and your family.

Remember to start investing in growth assets as soon as possible. But do not forget to consider your income & expenses, investment objective, your risk profile, and the time horizon before making any investment decision. Ensure that you do your own research before following anyone's advice.

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Happy investing!

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