Don’t Listen to Your Parents for Investment Decisions

The heading looks awkward. Your parents took care of you very well and played an important role in making you what you are today. Though parents have your best interest in mind always, you will end up making mistakes, if you listen to them for investment decisions.

Even though they want to help you, their knowledge on the new investment options is limited. Taxation rules have changed a lot from their period.  They will suggest the options available during their period which may not be the best options now.

Normally, they believe the following investment options as best.

1. Recurring deposits
2. Fixed Deposits
3. Public Provident Fund (PPF)
4. Life Insurance Polices
5. Real Estate
6. Gold

They feel investing in equity is risky and avoid share market. They suggest you to purchase a house taking a home loan in the early part of your career. They will encourage you to join the monthly gold savings scheme of jewellers. They cannot say NO to the nearby insurance agent when they ask for a life insurance policy on your name immediately after you are on the first job.

Now, let’s see the impact of these suggestions on your personal finance. Avoiding equity in the early part of your career will keep you away from the power of compounding.  If you start an SIP of 10,000 per month in equity mutual fund at age 25, it can create around 3.8 Crores at age 60. I have assumed a CAGR of 10% here. This can form part of your retirement portfolio.

Also Read – Retirement Planning and Simple Retirement Calculator in Excel

Purchasing a house in early part of your career can limit your mobility to new cities. In the current situation of frequent job changes, it can affect your career growth. There is nothing wrong in waiting till age 35 and purchase the house only when you are sure of the city/country where you are going to settle down. Huge home loan and the EMIs can affect your capacity to invest for other important financial goals in life.

Gold is losing its sheen. China and India consumes around 50% of the gold production. Demand for gold is coming down in both these countries. Investing in gold may not be a good idea now.

My friend purchased an endowment policy of 30 Lakhs in the name of his son recently.  It is a 30 year policy with an annual premium of around 90,000 per year. He feels that this policy can create a big asset when his son is aged 55.  Actually the returns from such policies are pathetic now.  The returns will come down again in line with the reduction in interest rates in the country. He is retiring next year and after that his son has to pay this huge premium for the next 28 years. His son just joined an IT company with a CTC of 4 Lakhs. How he is going to pay the 90,000 premium?  It is more than 3 months’ salary for him!

Recurring deposits & fixed deposits are safe investment options. No doubt. But they are not tax friendly. You have to pay tax every year on the interest income as per your tax slab.

Among the list of your parent’s suggestion, the only investment worth considering even now is the PPF. It is a flexible investment option where you can invest from 500 to 1.5 Lakhs per year as you like it. The entire maturity amount is tax free. Though it is a 15 year scheme, you can extend it after 15 years in blocks of 5 years.  This can be the best option for the debt component in your retirement portfolio.

So, the ideal list of products you should invest now are the following.

1. Equity mutual funds for long term goals.
2. Debt mutual funds for the short term goals
3. PPF/ PF/ VPF for maintaining proper asset allocation.

You should also have the following insurance as a backup plan.

1. Term insurance coverage for a decent value as per the expense replacement method of calculation. Purchase it online to reduce the cost.
2. Family floater health insurance policy in addition to the corporate health cover of the employer
3. Personal accident policy which offers disability benefits also

Of course, you can plan one house to stay and sufficient gold for ornaments, if your family need it.

Remember that most of us are not having pension benefits which our parents had. PF & gratuity is also not going to be great due to frequent job changes. Try to invest early in liquid growth assets to take care of the long retired life.

But listen to parents on all other matters. After all, they are the only real well wishers we have in this world.