Financial Planning for Families and How to get your kids introduced to money?
By Vaidyanathan Ravichandran [Senior Finance Manager at Risk Management Services LLC, Muscat, Sultanate of Oman - Retired, IRDAI certified Insurance Advisor and Sebi authorized & AMFI Registered Mutual Fund Distributor]
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“Money is not the most important thing in the world. Love is. Fortunately, I love money”.
So, I am going to do some money talk today – more specifically on how to encourage and develop an investment mindset in young minds.
For generations, we have been fed on the virtues of “saving” money from our childhood.
The safest way to double your money is to fold it over and put it in your pocket has been the first lessons on the subject from most parents.
Unfortunately, this approach has never been the right one.
Unfortunately, again, our basic school and college education systems have also shied away from even fundamental lessons about personal finance, savings and investments, as if these are dirty words not to be discussed in public and as if money-making is a sin!
The result- we have churned out generations who are not aware of the importance of the investment culture beyond basic savings tools and hence start late on their wealth creation process.
As Oscar Wilde put it, “anyone who lives within their means suffers from a lack of imagination.”
Now to briefly touch upon some basics of personal investment.
Investments can broadly be classified as Fixed Income and non-Fixed income investments.
Bank FD s lead the pack of Fixed income Investments, followed by Corporate FD s, Bonds, Debentures and the Government’s savings schemes. The last to jump into this bandwagon of fixed income products were the insurance companies with their Guaranteed Pension Plans.
The majority of Indians - brought up on a conservative diet of investments – opt for fixed income products for the bulk of their portfolio. The mis-selling by the institutions – the banks, the insurance companies and the intermediaries - also contributes to the investments being skewed badly in favour of fixed income products.
I say badly because fixed income products have this inherent limitation of relatively lower yields.
The interest rates on these products are periodically calibrated in line with inflation trends in the economy that the returns on these products cannot be expected to beat inflation over the long term. Thus, the real returns are usually much lower.
Add to this the problem of taxability on an accrual basis and the post-tax returns are even less attractive.
Thus the returns from a clutch of predominantly fixed income products would generally be so low that this would impede wealth creation over the long term.
Other options like Gold and Real Estate come with their own challenges of poor liquidity, low returns and high price volatility.
It is in this context that an exposure to equity investment becomes a must for every investor.
- In the wealth building process over the long-term, only equity - I repeat only equity - as an asset class can help beat inflation.
- None of the fixed income products can match equity in long-term returns.
- Over the long-term, equity can deliver 12%-15% p.a. inflation- beating returns, on a realistic basis.
- While returns are obviously not as predictable as those on fixed income products, it beats inflation 90% of the time, even during extended spells of volatile market.
- Instant liquidity is another big plus of equity investments.
- While conservative investors may hold risk of capital loss against equity, in reality this risk is negligible in the medium and long terms.
- I agree that direct equity investments – market trades , PMS or Small Cases - are not everyone’s cup of tea, especially if you are uninitiated into the equity market.
- Don’t lose heart – you have the Mutual Fund route to take an exposure to equity.
Mutual funds are an important investment vehicle in India, which provide investors with a convenient and low-risk way to invest in a diverse range of assets such as stocks, bonds and commodities.
One good thing about the mutual fund industry from an investor’s perspective is that the industry is well regulated and monitored by the Securities and Exchange Board of India. SEBI ensures that all Asset Management Companies operate in a fair and transparent manner and protect the interests of investors. There is near-zero risk of default in the mutual fund industry.
However, India still has a long way to go. We have about 3.8 crores of unique MF investors and USD 490 mil. of Assets Under Management (AUM).
For perspective, AUM in China is USD 4,000 mil+ - close to 10 times that of India.
Over the last few years, China has been adding one India every year in terms of AUM in MF industry!
A message for the current young generation: Get in early…You have the one thing Mutual Funds need - time. Let the magic of compounding create wealth for you and keep fueling your dreams!
As you all would have heard investment gurus emphasize, “compounding is the eighth wonder of the world”!
I bet you would not want to be left behind!
I urge each of you to start the habit of investing in equity TODAY, if you have not already started it.
Again, remember that returns from mutual fund investments are never linear but patience will inevitably be rewarded. Stay invested for the long term and handsome gains are a sure-shot certainty.
If you were wondering all along what did mutual funds have in common with Luma World … the same marketing mantra of catch them young …and more importantly, keep them captivated for a life time!
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Please ask your questions in the comments below.
As an ice-breaker, my suggestion is… What is a good date for starting SIPs?
