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How Investments Habits/Experience inherited from Previous Generation are hurting Wealth Creation Process of New Generation?




How Investments Habits/Experience inherited from Previous Generation are hurting Wealth Creation Process of New Generation?

 

I have observed that many of new generation Investors are following parents and grandparents while Making Investment. For E.g Investing into Bank FDs OR Investing into Various Small Savings and Post Office Schemes. When asked why, answer would be- this is how it is being done and/or they are safe.
 
Now, What is Safety while Investing? Infact why one is investing in the first place?
 
Investment is done to accumulate corpus for future major financial expenses such as Children Education or Marriage. When a family/individuals invest, she is sacrificing present Money for the betterment of tomorrow. Means utmost objective of investments is the investor should be able to meet future financial requirements. So the biggest risk an investor faces is not being able to meet future financial requirements fully or partially despite of sacrificing present.
 
Bank FD, Small Savings Schemes’s biggest risk is that they are not giving inflation beating returns. Means by investing into such instruments investors face the risk of not accumulating sufficient corpus required to undertake major financial Expenses such as Children Marriage. Hence despite of investing by sacrificing present for the future they face shortfall in their corpus.
 
So another facet of risk is not being able to accumulate required corpus despite of sacrificing present Money for the future.
Now gone are the days when, our parents and grandparents from whom you have inherited/learned investment habits of investing into Bank FDs/Small Savings Schemes, were giving 12% returns and also doubling money into 5-6 years. Our parents were earning enough returns to beat inflation and grow investments to meet future financial goals. Secondly Education was largely government funded which now has become largely self-funded.
 
So it would not be a wise thing to follow what has been practiced by our parents and grand parents as investments and economic environment during their time were quite different than the present.
 
Time has changed so your investments have to be changed.
 
In the current scenario last 20 years average Government inflation was 7-7.5%. And if we consider Lifestyle Inflation it should be in the range of 10-12% depending on your life style.
 
Lets understand life style inflation with the example of movie, during the days of single screen theatre, a movie ticket was costing Rs. 40-80 and popcorn was costing Rs.10-20 and now in the age of multiplexes movie tickets are in the range of Rs. 200 to 400 and popcorn Rs. 60-100. So this inflation is not covered in government inflation but we have neither stopped going to cinemas nor even reduced frequency.
 
So your investment portfolio ( combination of Investment Instruments such as Mutual Funds, PPF, Bank FD(if at all required) etc.) should generate at the minimum 10-12% to beat inflation and in order to grow should generate 12-14% returns over a period of time.
12-14% returns are not at all possible by investing into Bank FDs/Post Office Small Savings Schemes or PPF etc. If you wish your portfolio to not only beat inflation but grow beyond inflation, you have to come out of Investment habits inherited from your parents/Grand Parents other wise you are running serious risk of not able to meet your future financial goals even though the said investments are considered to be less risky.
 
The best way to start your investment journey is to first ascertain your risk profile, Investments Goals and Objectives, Tax and other Constraints and than decide strategic Asset Allocation before starting investing. Once you have decide asset allocation you may decide which investments instrument is to be used based on your financial goals. If you are not qualified to do all this things you can hire as SEBI registered Fees Only Investment advisor who should be able to help you not only to start your investment journey but shall also guide you throughout your life.
So do not become victim of inherited habits/Experiences of your parents as situation back then were quite different than the present environment.



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