The level of financial literacy is very low in India. As most people don’t understand the nitty-gritty of complex investments – that involve calculation of compound annual return or compound annual growth rate (CAGR) through internal rate of return (IRR) or other formulas – simple investments like fixed deposit (FD), recurring deposit (RD) etc top the list of investors’ priority.
Moreover, investors prefer FDs over equity-oriented investments like mutual fund (MF) simply because the principal amount in FD doesn’t fluctuate like that of the capital invested in equities.
So, most investors prefer FDs due to the capital protection, oblivious of the fact that the capital invested in FD loses its purchasing power over time as the FD rates are currently lagging the rate of inflation.
“A recent survey done by the Association of Mutual Funds in India (AMFI) indicated that 72 per cent of the population does not know how to achieve financial freedom by investing the proper amount. While 56 per cent of the participants have no knowledge about personal finance, 76 per cent of them believe that there is a need for financial planning education. So when children become aware of money you can teach them the importance of saving and investing,” said Prashant Sawant, Co- founder, Catalyst Wealth.
However, things are changing over time as new generation investors are not averse to taking calculated risks and ready to take informed decisions.
But to make them capable of making informed decisions correctly, providing investment exposure along with financial education is important.
“Picking stocks with your children will lead them to know the basics of investing. This will eventually help them in their future financial goals. Being a parent holds a lot of responsibilities, especially now that the child’s education cost has risen so high. To-be parents need to start investing for their children in the short term and long term. There are various financial instruments available for this. It is always best to consult a professional financial planner for investments,” said Sawant.
Apart from selecting the financial products based on their merits, it’s also important for the children to learn how to make a financial plan to identify their financial goals and determine how much to invest where to achieve the goals by taking minimum risks.
“Parents need to tell children about the importance of financial goal setting and educate children about how to allocate money based on the time horizon for each goal,” said Sawant.
Before letting the children handle money of their own, it’s a good practice to handhold them till they learn to make independent financial decisions properly.
“A parent can open a custodial account on behalf of their children. Helping children in choosing stocks will lead them to understand the nuances of investing, how to choose stocks, bonds, understand profit and loss, risk and rewards. The financial decisions are taken by the custodian (parents). When the parents need the money for their child’s education, they can use these funds as well as this will prepare and help the children to make righteous decisions and hone new skills while growing up,” said Sawant.