Don’t mess with parents’ money!
Children must not exert pressure on parents to invest in products they don’t understand
Two years ago, I wrote an article in this column on financial advice that parents should stop giving their children. Now, in this age of quick money, I think it’s time to turn it on its head.
In what I perceived as one among my many foolish decisions, a decade, and a half ago, I had suggested mutual funds to my father, a retired, life-long deposit investor. His expectation of regularity in dividends, regular account statement and expecting the fund to grow in a linear fashion, all stressed him as well as me. At the earliest chance, I convinced him to exit and lock into traditional deposit options. His life got better, and I felt more relaxed!
The product I recommended was clearly not bad, but it just didn’t fit my father’s expectation and need.
But now, well after a decade, it appears that there are a mix of bad products as well as unsuitable products that the current crop of younger and ‘aware’ investors are advising to their parents.
Gen Y now ask us if their senior citizen-parents should not be investing in a high-yielding debenture or in a ‘deposit scheme’ with a popular P2P platform instead of poorly returning fixed deposits. We also hear of Gen Z (no, they don’t ask us, they ‘tell us’ on social media or family WhatsApp groups) chiding their parents of being old timers and not do ‘cool’ things like Bitcoin or NFTs. Parents are never going to move their wealth needle with old-fashioned deposits and mutual funds apparently!
There are a few things you need to know before imposing your own likes and risk tolerance on your parents: one, you have many more years to earn and make up for any lost wealth in bad products. They don’t have that luxury. Two, you understand (or often think you do) some of these complex products and their risks while they don’t (for good reason). Three, they likely have a regular income need from their corpus whereas your primary requirement is to grow your corpus. That means they will prefer something ‘fixed’, even if it means nominal returns, provided it gives them certainty of cash flow over something that keeps changing every day of the year.
Four, their income need cannot be steadily met if their capital lacks safety. Five, they cannot run around in the no-face digital world or to physical courts seeking justice for any money they lose. This can cost them their health and peace of mind. And lastly, some amount of liquidity is important to them more than it is to you since their borrowing and repaying capacity is lower than yours.
Certainty, safety, simplicity
Old fashioned deposits, post office schemes and a few government income schemes all provide certainty of income – for 5, 7 or even 10 years. The products you suggest don’t. Take mutual funds. If your parents have not invested in mutual funds before, you can at best suggest that they take a small exposure to it, if they understand how it works. They cannot substitute the traditional options. Remember a famous fund house where the money got locked in for almost a year before it was (and is) released in instalments. We have heard any number of tales of many senior citizens dependent on it for their income.
Options such as an immediate annuity is not a bad idea even if it earns 5-6% provided your parents have the certainty and safety of such a cash flow.
If you try to replace your parents’ deposit with an alluring 9% plus returning bond, saying it does the same thing — ‘pay a fixed return’ every year — you are not telling them the whole truth. Neither will they know their return (yield) is different from the coupon rate nor will they know that a fall in credit rating can spell doom for the bond.
Nor will they know that if they try to exit it in between, unless they know the rate cycle, they may even sell at a loss. This doesn’t sound like a fixed deposit in its simplicity, safety, or certainty, right? Needless, to say the highly attractive perpetual bonds are a class in risk by themselves.
If you tried to suggest the idea of investing in high-yielding ‘alternatives’ to deposits (like P2P lending) – through lending platforms or hybrid NBFCs, then did you tell them that the deposit that they will invest in is nothing but a loan to a faceless person or company; likely someone who could not get a loan from a bank? Did they know that their capital was at risk and the underlying NBFC is poorly rated in terms of its credit worthiness? There are hardly comparable products to a bank FD or post office FD! Don’t be sure your parents will find it cool to be lending to people they don’t know with no mechanism like a bank to safeguard them.
If your parents have dabbled or invested in stocks earlier, then they can do so confidently in their senior years too. But don’t push them into the world of stock trading or derivatives simply because you read about meme stocks or saw a video on multi-baggers. Nor is it ok for you to hone your skills in trading with their money. Let it be your own money! Index funds, at best should do for them!
And finally, if you mocked them for having a portfolio without Bitcoin or NFTs – let me stop with asking you one question – do you know who regulates them? If you don’t, you have little business recommending it to them.
Well, if you recommended ill-fitting products to your parents, I can only smile. I am only reminded of the never-ending stream of sensible questions and complaints my father had. You will get no less! And you will learn.
(The author is co-founder Primeinvestor.in)
Read more: https://mcc.exchange/2021/09/12/dont-mess-with-parents-money/
Text source: MCC.EXCHANGE
