Most of us are not taught anything about money in school or in college. When we start earning, we realise that we really don’t know much about investing and go by what our parents say or do. But before doing exactly what your parents did on investing, there are three questions to ask yourself. Did your parents get wealthy investing the way they did? Did they meet all their life goals? Were their life goals the same as yours? If the answer to all these questions is ‘no’, then it’s a clear sign that your parents’ advice on investing may not suit you.  In this episode of Question of Money, I’m going to talk of 4 pieces of investing advice you shouldn’t take from your parents.   

A home should be your first investment 

“Buy a home and settle down” – many parents tell their sons or daughters this if they’ve been working for a year or two.  Folks of the earlier generation valued stability and loyalty over everything else. They stayed with the same employer for 10 plus years and the same city or State too. Therefore, it made sense for them to buy a home early in life and settle down. But today, your career depends on your ability to upskill, your mobility and willingness to switch jobs. Buying a home in your 20s can severely restrict your mobility. In an earlier video we explained that in India the EMI for a flat is at 3 or 4 times the rent that you pay. So taking on an EMI for the next 15 or 20 years can tie you to a location where opportunities may be limited.  Therefore, don’t buy a home too early. Instead invest those sums in SIPs in equity or hybrid funds. By the time you are 40 or 50, you may know where you’re going to settle down. That’s when you buy a home with the corpus you’ve built.   

Max out your EPF contribution  

For many folks in their 40s or 50s today, their biggest investment was the Employees Provident Fund or EPF. EPF is no doubt an easy savings vehicle, because the employer automatically deducts sums from your salary every month. The EPF has also been declaring an 8-8.5% interest which has been better than bank deposits.   

But young employees today cannot simply max out their EPF and hope it will take care of their retirement. For one, a fixed interest of 8% or 8.5% will not be enough to build your retirement kitty. Returns on EPF contributions beyond Rs 2.5 lakh a year are also taxable at your slab rate now. To build a sufficient retirement kitty without investing enormous sums you need a higher return from your investments – say 12-13%- which only equities can deliver. Two, EPF rates in future may be lower because of falling interest rates. Three, it is not easy to vary contributions or withdraw from your EPF. Mutual funds give you more flexibility about how much you contribute, how much equity you choose and when you can pull out.  

Go for government-backed schemes  

In the 80s and 90s, India’s financial markets were not well regulated. It was very common for investors to lose money on chit funds, deposit schemes and stock markets because of scamsters. This prompted folks to stick with government-backed schemes such as the PPF, NSC, post office Monthly Income Scheme etc. High interest rates also made these schemes attractive.  

But with interest rates falling that is no longer the case. Today most government schemes give you returns of 7% plus that are taxable and don’t beat inflation. In the last decade, financial market regulators such as RBI and SEBI have also tightened the rules a lot for entities that raise public money in any form. Investors also have many online resources to run a check on an entity that is soliciting their money. All this means that non-government backed options such as NBFC and bank deposits, NCDs, mutual funds, portfolio management schemes, stock advisory services etc. Private sector financial products are infinitely more user-friendly and transparent than government schemes.  

Guaranteed returns are better than market-linked returns  

Investors of the earlier generation had an active suspicion of market linked products and loved guaranteed returns. But did you know that the entities who give you a guaranteed return - the post office, banks, NBFCs, insurers – themselves invest in market instruments for returns? So all you are doing by handing over your savings to these institutions is incurring additional costs for intermediation. When you invest directly in market instruments like government bonds or corporate bonds, you get to enjoy market returns without an intermediary. Today, retail investors enjoy direct and easy online access to government bonds and corporate NCDs via regulated platforms. So there’s no need really to pay a middleman and lock yourself in, to get fixed returns.

(Host: Aarati Krishnan, Producer & edits: Anjana PV, Camera: Bijoy Ghosh & Siddharth Mathew Cherian)

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