BUSINESS

Here's Why It's Dangerous To Follow Your Grandparents' Financial Advice

Really, you should be the one leading them through smart investment options.

15/04/2017 11:33 AM IST | Updated 17/04/2017 9:40 AM IST
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If someone tried to offer you a pager device today, would you purchase it as a medium of communication? Would you opt for the coal-driven bulky iron to get the crease-free look? We can see your head turning and eye-brows twitching.

Why then look at the traditional means of savings in an era where smart devices are replacing the wired world? As per Reserve Bank of India (RBI) statistics, nearly half of Indian household savings are parked in fixed deposits over the likes of mutual funds, life insurance and direct equity for their savings pool.

The trap of 'safe' but low-yielding fixed deposits

You would argue that fixed deposits have been the most trusted savings instruments by your parents and grandparents and they have stood the test of time. But a look at the returns they garnered on the instruments and inflation in the corresponding period would force you to rethink your options.

The PPF interest rates reigned in at 12 per cent between 1986 and 2000. Over a period, they have been on a downward spiral to the current levels of 8.1 per cent staring October 2016. The average inflation during 2000 was 4 per cent. So, an interest of 12 per cent translated to real-return of 8 per cent (12 per cent-4 per cent inflation). Today the investors face a double whammy of high inflation and low returns, shrinking the actual money growth.

Today the investors face a double whammy of high inflation and low returns, shrinking the actual money growth.

The edge of equity

Hence the edge of equity is needed to improve real returns. Equity investments should be considered for long-term savings as the risk of negative returns reduces. BSE Sensex has generated rolling returns of 15 per cent over the past 15 years. Those who have the advantage of age by their side should allocate a higher sum to equity as their goals are farther away.

Someone who saves ₹5,000 monthly in a conservative fixed-income portfolio would be able to accumulate ₹65 lakh over 25 years as against a savings pool of ₹1.35 crore built by another individual who opts for an aggressive portfolio with 85 per cent equity exposure.

Those who don't have the wherewithal to invest directly can select from the wide gamut of mutual funds available based on the stomach for risk or the National Pension Scheme (NPS) for retirement savings. Your father wouldn't be able to handhold you through these new alternatives, which he hasn't tasted.

Instead of blindly following your elders' footsteps on the investment path, it is time to lead parents through smart investment options

Fixed income apart, the fascination for physical gold in the country is unmatched. Given that there are risks associated with investing in gold namely purity, theft, storage charges and lower returns due to higher mark-up charges, better paper-gold alternatives such as gold exchange-traded-funds, gold fund-of-funds, sovereign bond funds, which fetch additional annual interest should be considered. You can't strut paper gold around weddings, but cost-effective fashion jewellery can come to your rescue.

Instead of blindly following your elders' footsteps on the investment path, it is time to lead parents through smart investment options in the era of shrinking interest rates, just like you help them swiftly move their fingers on smart phones.

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