When they start earning, most young people blow away their salaries on eating out, new clothes and expensive gadgets. But Sailaxmi Reddy (see picture) quietly started SIPs in four equity funds and opened a recurring deposit. “I don’t have too many expenses right now and can save a big chunk of my salary,” says the Mumbai-based bank executive. She wants to save aggressively for the next 10 years to fund her entrepreneurial dream.
Sailaxmi Reddy, 22, Bank executive, Mumbai
Nudged by her father Dhananjay Narayan Reddy, Sailaxmi started an SIP of Rs 500 in an equity fund while still in college and has since steadily hiked the investment amount. She now invests Rs 15,000 a month—more than 50% of her net take home salary. She is saving to fund her entrepreneurial dream.
In another part of the city, law student Aditi Joshi is reviewing her stocks portfolio. Bluechips such as Infosys, Reliance and Grasim are stable, but others like Parag Milkfoods, Marico and Himadri Chemicals are facing rough weather. “As a long-term investor, I don’t need to worry. But some changes may be needed,” she says. Joshi started with fixed deposits but soon realised that they weren’t for young investors like her. “I read up about technical analysis and learnt about equity research through various blogs and Youtube videos,” says the 20-year old.
In Bengaluru, commerce student Manav Agarwal is getting ready to invest in mutual funds. He read up several books on personal finance when he was bedridden for 2-3 weeks after a road accident earlier this year and now has a good understanding of mutual funds. This 19-year-old wants to start SIPs in an equity fund out of the money he saves from his monthly allowance.
Youngsters like Reddy, Joshi and Agarwal have a headstart in their investing journey. While most people their age are searching for new ways to spend money, these young investors have already started creating wealth. Much of the credit for this goes to their parents and teachers. Reddy was nudged by her father, Dhananjay Narayan Reddy (see picture), to start saving early. “He read a lot of newspapers and gave me clippings of articles on financial planning and investing strategies. He made me start an SIP of Rs 500 in an equity fund while I was in college,” she says.
Aditi Joshi 20, Law student, Mumbai
Aditi developed an interest in finance and investing after reading Sudha Murty’s ‘How I taught my grandmother to read’. She learnt about technical analysis and other investing concepts through blogs, YouTube videos and financial portals. Her quest for learning was inspired by her mother, a maths teacher.
Joshi’s foray into investing was inspired by her mother, Devyani Joshi, who teaches maths to school students. Agarwal didn’t get any investing lesson at home but was encouraged to delve into the financial and capital markets by his professors and seniors in college. “My parents didn’t dissuade me from investing but wanted me to learn about it before I dived in,” he says.
Yogesh Tungaria 22, CA Article, Mumbai
Yogesh learnt about investing and finance while doing his chartered accountancy course. He is not in the tax net yet but invests Rs 3,000 in an ELSS fund every month. He says the lock-in will force him to remain invested through thick and thin, and thereby control the urge to quit early.
Also read: 9 money management skills kids should learn: How does your child score?
Early bird advantage
Not everyone is as lucky, though. An early start certainly gives a big advantage to an investor but a large majority of Indians is denied that benefit. Financial literacy is not taught in schools and colleges and families don’t discuss money matters with children. As a result, millions of Indians start working (and investing) without basic knowledge of personal finance. “You won’t allow your child to drive before she learns driving. So, why do you let her invest without basic money skills?,” asks Deepti Goel, Associate Partner, Alpha Capital.
In some households, discussing money matters with children is considered a taboo. “There is hesitation to broach the topic of finance with children. It is considered a taboo and seldom gets discussed,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories. This is surprising because the lessons learnt at an early age guide the person throughout his life. “What you teach your children about managing money will have far reaching impact on their financial lives,” says Amol Joshi, Founder, Plan Rupee.
The problem is that parents themselves are not the best source of investment advice or money management. Given the low level of financial literacy in India, their advice is often wrong, misleading or both. For one, they may not be aware of the market situation or have adequate knowledge of financial instruments available. They could also be prejudiced by their personal experience.
Manav Agarwal 19, Commerce student, Bengaluru
Manav was encouraged to learn about investing and markets by his professors. He read up books on personal fi nance when he was bedridden for weeks after an accident earlier this year. He understands mutual funds and wants to start SIPs in an equity fund out of the money he saves from his allowance.
Poor knowledge = Bad advice
Young investors are at greatest risk. According to a study by Hyderabad-based financial planning portal ArthaYantra. com, nearly two out of every three professionals aged 21-25 years base their financial decisions on their parents’ advice. Traditional life insurance policies are an all-time favourite investment choice. It’s common for people to buy an endowment or money-back policy for their child as a gift. They pay the premiums for the initial years and shift the onus to the child when he starts earning.
They might think they are giving their child a great gift, whereas they are actually saddling him with a suboptimal investment for the next 15-20 years. “Parents often push youngsters to start saving. But if children are pushed to invest in life insurance policies and PPF, it may lead to suboptimal outcomes,” says Vipin Khandelwal, Founder, Unovest.
To some extent, the older generation can’t be blamed for forcing poor investment choices on children. They have lived through stock market scams and mutual fund collapses. Life insurance policies, bank deposits and small savings schemes came across as the best ways to save money. They want their children to also invest in the instruments that helped them create wealth in the past.
Investment choices apart, parents need to lead by example. They can’t be splurging themselves and expecting their kids to be prudent with money. Missing EMIs and reckless borrowing can send the wrong message to young, impressionable minds.
“If parents are unable to delay their own gratification and rely on EMI-based financing, they won’t be in a position to advise youngsters on the virtues of patience and long-term investing” says Jayant Pai, Head – Products, PPFAS Mutual Fund.
Baby steps in financial world
Parents also need to handhold their children through the maze of the financial services industry. Introduce your child to plastic money by opening a bank account and giving him a debit card. Children learn to manage budgets better and understand the value of money more effectively if they are in charge. They might make a few mistakes initially and even blow the entire month’s outlay on one party with friends. But only when they are forced to spend the rest of the month in utter frugality will they realise that money is not an unlimited resource. “It’s better they learn the basics of budgeting when they are in college and the amounts are small, rather than later when overspending can lead to more serious problems,” points out Raj Khosla, Managing Director, MyMoneyMantra.
Depending on the individual’s requirement, the parent can transfer money to the child’s account and set transaction restrictions and daily spending limits on a debit card. A parent can even provide an add-on credit card and set appropriate limits on spends. The use of plastic money helps familiarise young adults with how the financial world operates. It is equally important to teach the child about the potential risks posed by fraudsters.
Can money talk backfire?
While it may seem a good idea to teach money skills to young children, some people think that this could distort the value system of the child. He may start equating money with virtue and lack of wealth as undesirable. “It’s a genuine concern which led our elders to insulate children from money talk,” says Rohit Shah, Founder & CEO of Getting You Rich. “But times have changed and children are now smarter and understand things better. If kids are taught about money matters, they learn the value of money,” he says.
Other experts agree that money talk should not be a taboo. “No personal finance book exhorts you to earn wealth at any cost. The urge to earn wealth needs to be managed, through (perhaps) a supplementary course on ethics,” says Pai. “A correct understanding of money will never distort the value system. After all, we all agree that sex education is required in school and don’t question whether it will corrupt the value system,” says Sadagopan.