Should Parents Tell You How To Invest Their Money

Synopsis

The moment a child starts earning, a worried set of parents is ready to dispense advice on how he should save his hard-earned money. While there's no doubting the trust factor when it comes to parents, they may not always be the most efficient sources of investing advice

The uncertain nature of the stock market was completely anathema to parents.

The moment a child starts earning, a worried set of parents is ready to dispense advice on how he should save his hard-earned money. Trusting his parents and with little experience or knowledge to take his own decisions, the child follows them blindly. Inevitably, a traditional insurance plan, fixed deposit and house are brought on the agenda.

While there's no doubting the trust factor when it comes to parents, they may not always be the most efficient or effective sources of investing advice. It is important for the child to conduct his own research or approach a financial adviser before starting his investing journey. Here are some reasons parents' financial wisdom may not suit the children.

1. No difference between insurance & investing

For parents who depended on traditional insurance plans to achieve all their financial goals, advising their kids to do the same is natural. However, it is important to keep insurance separate from investment. Traditional plans not only give very low returns, but also provide inadequate life insurance. With pensions and several government benefits to fall back on, the traditional plans were sufficient for parents to achieve their milestones, but won't be for children who need to create their own retirement corpus and medical buffer.

2. Not enough knowledge of new investment tools
With limited investment options, it was not difficult for parents to choose an instrument. Today, there are many more options, especially in equity and debt mutual funds, to build and diversify a portfolio. Depending on their goal values, time to achieve them, and expected returns from different assets, the children can pick options that not only give the desired returns, but also reduce the risk of the portfolio.

5 reasons why parents' investment advice may not work for you

One size does not fit all

While there's no undermining the trust factor when it comes to one's parents, they may not always be the most efficient or accurate source of investing guidance and advice. This is because our parents, as opposed to us, may have had a different set of money experiences and a distinct financial journey. Their goals, income, expenses would have been at least somewhat different.

Besides, what once worked for a previous generation may not hold true in contemporary times. There is a reason that some investments such as gold, real estate are labeled 'traditional'. Thus, it is crucial for all of us to conduct our own research or get on board a financial adviser before starting our journey as investors. Here are a few reasons why parents' financial wisdom may not suit their children.

Investment and insurance are not the same

In financial planning, the understanding that insurance and investing are completely different goals is crucial. Parents who relied on traditional insurance plans to achieve financial goals will naturally pass the learning down to their kids. Remember that traditional plans not only give very low returns, but also provide insufficient coverage. With pensions and several government benefits to fall back on, these were enough for parents to achieve goals but won't be for children who need to create their own retirement and emergency corpus.

Know the new investment tools

Back in the day, parents were not spoilt for choice when it came to investment options. Today, the pool to pick an investment instrument from is much bigger, especially in equity and debt mutual funds. Depending on one's goal values, time horizon, risk appetite and expected returns from different asset classes, one can pick options that not only give desired returns but also reduce portfolio risk.

Tax rules have changed

Parents were typically so focused on choosing safe and conservative investing options that even if the post-tax return from fixed or recurring deposits was low, it was acceptable. Now, one can use mutual funds, which not only give better post-tax returns but are relatively safer too.

Realty and reality

Most Indians till date hold home-buying in high regard. Real estate is always on their mind and in most portfolios. However, for someone who has just entered the professional world, is a new and young earner, dipping his/her toes in real estate is not the best option. This child may move in and around different cities or countries. In such a case, a house would not only be a financial liability but also confine him and restrict not just movement but even his growth. Real estate would make more sense when he/she knows which part of the world they will be in for the long-term, when they plan to start a family etc.

3. Not updated on tax rules
Parents were typically so focused on choosing safe and conservative investing options that even if the post-tax return from fixed or recurring deposits was low, it was acceptable. Now, one can use mutual funds, which not only give better post-tax returns but are comparably safe.

4. Fixation on buying house
Building a house was, and is, a priority for most Indians. Yet, it may not be the best option for a child who has just started earning and may want to shift to different parts of the country, or even abroad, for his job. A house would not only be a financial liability, but also tie him down at one place. It would make more sense to buy a house once he starts earning more and has an idea about where he wants to settle.

5. Fear of the market
The uncertain nature of the stock market was completely anathema to parents. However, the option of mutual funds today could help the child invest in equity in a controlled manner. While the advice of a financial planner may still be required, at least equity offers the option of higher returns with manageable risk.

6. Retirement not a priority
Earlier, most parents depended on their kids to support them after retirement. As such, it was easy to finance other goals, including education and marriages of kids, and house purchase. Today, the family structure and kids' lifestyle is such that it may not be possible for them to support their parents or depend on their kids. Building a substantial retirement corpus would, hence, necessitate a different investment strategy.

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Disclaimer
The advice in this column is not from a licensed healthcare professional and should not be construed as psychological counselling, therapy or medical advice. ET Wealth and the writer will not be responsible for the outcome of the suggestions made in the column.

( Originally published on Aug 24, 2020 )