‘Save regularly, invest early’; the golden rule for living a happy and secure life. Isn’t that what you have been hearing right from the day you earned your first paisa? Not just once, but over and over again.
Parents, relatives, neighbours, well-wishers, and everyone else who seems more experienced than you at investing, keep reminding you of the importance of saving and investing until you give in and start taking your investments seriously.
But hold on. While everyone is busy advising you on where to invest, did anyone tell you about the investment avenues to avoid? Hopefully, you haven’t mimicked your parent’s generation while taking investment decisions.
Though advice is always well-meaning, it is important to understand whether it is in accordance with your aspirations and financial expectations.
The landscape of financial planning has changed drastically with the rapidly changing lifestyle, earning potential, expense ratios, return expectations and choice of investment avenues. Thus, you must consider all of these before making an investment decision, unless you are willing to fall into a financial trap. While selecting the preferred investment avenues is entirely your choice, a list of the most common mistakes that every millennial should avoid can prove to be of great help.
Here’re top 3 mistakes that you should avoid while making an investment decision-
Endowment Plans have been a hot favourite product amongst those who are in their 40s and 50s. For those who don’t know about endowment plans, they are insurance-cum-investment plans that are not linked to markets. In other words, endowment plans offer assured returns, besides providing an insurance cover. The mom&pop-generation perceives them as a safeguard against future uncertainties.
Invest heavy premiums right from the early years and get a secured return in the later years. But is it apt for you? An absolute NO!
Endowment plans deliver returns in the range of 4%-5%. These are rates that hardly beat inflation, which means that by the time they hit your bank account, they will hardly be of any help in meeting your expenses.
Plus, do you really want to block a hefty amount from your income to pay for the heavy premiums? Consider the table below:
Assumptions: Return on endowment plan-5% CAGR
Return on equity/equity SIP 12% CAGR
Insurance will continue to earn tax-efficient returns
The long term capital gain tax would be 10%, without indexation, on equity and equity mutual funds.
After looking at the above table, do you still think you should invest in endowment plans?
Is it not better to invest it in equity or equity mutual funds that can help you garner the benefits of compounding and accumulate a large sum by the time you really need it? As for insurance planning, it is wiser to secure yourselves and your close ones with health insurance and with a term plan.
The desire to see one’s nameplate outside one’s ‘own residence’ is unreasonably high amongst most parents. These aspirations usually pass on to genNext.
As a result, genNext gets trapped with the burden of home loan EMIs in their late 20s or early 30s; the time when they should actually channelize their savings into tools that can help them accumulate funds for the future. Burdened with long term instalments that barely leave a surplus, you compromise on life’s little joys and aspirations. You also live under the constant fear of economic instability and its undesirable consequences. Despite all this effort and sacrifice, chances are high that you might switch your job and location and may not live in the home built with your sweat and blood.
Renting a home until you are completely ready to shoulder the EMI burden sounds more realistic, doesn’t it? Unfortunately, most of us don’t realise that. High inventory in metro cities suggests that affordability of housing is a major issue.
On the other hand, falling rental yields suggest that capital appreciation isn’t as fast as one might expect at the time of buying a home on EMI.
With limited awareness about financial investment avenues, the mom & pop generation preferred to trust the bank and relationship managers for their financial decisions.
Also, maintaining good relationships with the bank was a necessity then, as the relationships were the deciding factor for personal loans, home loans, education loans, and so on.
Today, with unrestricted access to the internet, automated mechanisms for loans, and heightened awareness about available financial tools, you need not follow their footsteps. Though we are not against taking advice from your relationship manager, ensure the product is suitable for you and meets your needs.
That said, the mom&pop generation wasn’t foolish. It knew the importance of savings and had the knack of saving more without letting us feel the pain of hardships. If millennials want to be remembered for their money wisdom, then it’s time to embraces changes and avoids the investment mistakes that may have been prudent investment wisdom in the time of the previous generations.
As they say, there is nothing permanent except change.
Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. Information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.