Photo: iStock
Photo: iStock

Millennials’ paradox: will risk life, not the money

Those in their 20s and 30s need to update their ideas about money if they want to safeguard their financial future

Are you in your mid-20s or mid-30s with a regular salaried income? How are you managing your money? When you manage to save something from your salary, where do you usually invest it? Typically, most people with the above profile would say that go for financial products with guaranteed returns. The reason they give choosing these products is that they do not want to lose their capital investment.

What is puzzling is that in all other aspects of life, the millennials are not afraid of taking risks. Whether it is taking a break from full-time job to travel the world, following their passion or trying out different kinds of work and career options—this generation is willing to explore new avenues and take risks. However, when it comes to financial investments, most of them are very risk averse. If you want your money to work as hard as you do, you may have to make a few changes in the way you look at investment products.

In fact, if they were to consult financial planners, they too would advise these young investors to do things very differently. “If your real returns just match the rate of inflation, then you are actually losing money," said Surya Bhatia, a New Delhi-based certified financial planner and managing director of Asset Managers, a private wealth management firm.

If you are a salaried person, the time when you can try out new options and also take maximum risks with your financial portfolio is when you are in your mid-20s and mid-30s. However, most people in this age group have portfolios similar to that of their parents. “Most of them tend to take financial advice from their parents. Since their parents have been investing in guaranteed products, such as fixed deposits, they also end up investing in products that can give them assured returns," said Vishal Dhawan, a Mumbai-based certified financial planner and founder of Plan Ahead Wealth Advisors, a financial planning company. However, this can prove to be a counter-productive move because by trying to be overprotective about your capital, you could actually end up preventing your money from growing.

The other major money mistake these new investors tend to make is that they seem to go primarily for products that have a high degree of liquidity.

“Most individuals in this age group don’t have a defined set of goal. Hence, they end up investing in products with higher liquidity. Their goals, such as higher studies or supporting their parents, have some elements of unpredictability and hence they don’t want to take the risk of high lock-ins. The common attitude towards money is that they don’t want to take a long-term view on it," said Dhawan.

Another erroneous assumption that most individuals in this age group have is that they will not live longer that 60-65 years. “It is a common misconception that you will not live longer than 60-65 years. Nobody takes a gun to bed every day saying that you are going to fire the gun when you turn 60 or 65. In any circumstance, you don’t know what is going to happen. In general, life expectancy has been increasing every year. Also, considering people are getting married later and having fewer children and that too later in life, you can’t depend on children for money. Hence, you have to build a kitty for your old age too," said Bengaluru-based Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd, an investment planning firm.

To begin with, you need to change your attitude towards money. “You should know that the riskier assets help you beat inflation. If you are happy with returns that just match inflation, then your money is not actually growing. When it comes to investment in risker assets, you should take a long-term approach of 7-10 years," said Bhatia.

Financial planners say that playing safe can be risky too. “In fact, a safe option can be a risky option. The risk here is not having enough money to be financially independent for the rest of your life. If you are a high net worth individual (HNI) and can afford not to take risks, because you already have more than what you need, then it is fine. But if you are not an HNI, safe is not equal to risk free," said Sunder.

Taking risk doesn’t mean you blindly jump into any product that gives you higher returns. You need to first understand the product and only then consider investing in it. For starters, take small steps to change your asset allocation. “Firstly, acclimatize yourself with the new asset class you plan to enter into. For instance, to begin with you can start with 30-40% exposure in equity through equity mutual funds," said Sunder.

If you are not yet ready to invest in products, for say 7-10 years, one way to increase your exposure to growth assets is by starting with products that have smaller lock-in periods. “One of the things we encourage is to invest in ELSS (equity-linked savings scheme). It has a 3-year lock-in and gives you a sense of investing in a product that is slightly longer-term than say your 1-year fixed deposit," said Dhawan.

Though it is good to depend on your family and friends for emotional support, when it comes to financial advice you should prioritize professional help. “In general, we see people going to their friends, families or bankers for financial advice. Banks will try to push products that help them earn higher commission. You should, instead, go to an independent financial adviser who will encourage goal-based planning," said Nisreen Mamaji, certified financial planner and founder of Moneyworks Financial Advisors, a financial advisory company.

You also need to be fully aware about the products that you are investing in. “This is possible only through education. Say you want to buy a car. If your fixed deposit doesn’t help you achieve that goal, you may get disgruntled. Bankers may give you a whole set of reasons why you should not redeem your fixed deposit. You may have invested in a wrong product for that particular goal," said Mamaji.

Since you still have over 20-30 years for income generation, it will be prudent to diversify your portfolio and invest in products that will help you grow your wealth in the long term. And your future self will thank you for taking this decision right now.

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