There are some well-meaning parental investment tips that are misplaced in this day and age. Tread with caution if you come across these
By: Tavaga Research
Our parents’ advice has helped us through thick and thin. Often well-meaning and drawn from experience, some of the advice, however, may have become dated. Millennials, for example, find current investing advice at odds with what they hear their parents say.
We list out some of the beliefs of the older generation which worked then but are rendered irrelevant in today’s financial environment.
“Save, save and save”
Fixed deposits were the stars among savings and interest schemes for parents (especially the salaried) in the eighties and nineties. The economy was yet to open up and the staider the route, the higher chances of retaining the money.
Cut to today and it is actually considered rash to leave all of one’s earnings in an FD or a savings bank, as elaborated here.
Of course, our parents are onto something indispensable in this debate — instead of spending on and hoarding stuff early on in our working lives, we should put our money to work. Only, not by saving traditionally, but by investing to brace for inflation.
For those amongst us who are starting our careers, it is best to save up to three months’ salary and invest the rest. As we progress, we can ramp up the emergency liquid savings to six months’ worth of salary.
“Own, don’t rent”
This piece of wisdom stemmed from a time when rents were comparable to the EMIs payable on home loans. They are not anymore. Rents are a small fraction of the EMIs, especially in large cities with sizeable working populations.
So, by renting, we won’t necessarily be paying someone else when we could have been better off owning an asset and paying EMI. By renting, today, we would be saving more to compound our wealth through other means. A large portion of our EMIs goes into servicing the interest to banks before our principal starts getting reimbursed, anyway.
Owning property, even if it is to stay in (for investment, it is even riskier), will mean we lose flexibility. We would get tied down to one city, and moving with the best opportunities becomes cumbersome. In contrast, renting appliances to renting a house carry far less maintenance hassle and offer more freedom.
Selling a property in what is essentially a sedate market might not help us recover the expected appreciation.
Owning property can come in at a more mature stage in life, and in India, when the property market is about to perk up (right now it is in a bubble ready to burst).
“Avoid the markets”
One overriding errant trend in parental advice is the discouragement to invest in equities and other market instruments. For many of them, these were never the primary investments. Gold and real estate remained the holy grail.
The markets are evolving in India with modern products such as exchange-traded funds or ETFs (globally preferred by retail investors) making inroads. More and more regulations are bringing in greater accountability. Hence, the risk appetite today is likely to increase from what our parents were comfortable with.
With ETFs, for example, our money would track the indices in the stock market in passive management (no human intervention in guiding our funds and hence, no biases).
Sensex, the index for the Bombay Stock Exchange, has given a historical return of around 13.90 percent in the last three years and around 28.21 percent in the last five years, while the National Stock Exchange’s Nifty has given 8.63 percent and 24.77 percent, respectively.
5-Year Chart of ICICI Prudential Sensex ETF
“Buy insurance as the first investment”
Insurance is not an investment product and it has been amply demonstrated why we should stay away from insurance policies claiming so. Moreover, financial advisers point out how it might not be the first financial product one needs to buy. But many of our parents consider insurance as a must-have.
We can get a term insurance policy out when we have dependents of our own. And rather than a pension policy with a low yield, it might make better sense to get health insurance even before a term policy.
Of course, the caution and wisdom parents impart are to be discredited only at our risk. They have been born of the years our parents have put in to build their lives and ours. With a little tweaking, we can sharpen them to suit our investing strategies, as well.
Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time.