Parental advice on traditional savings and investment may not work for Gen Y

When Mr.X started his career as a management trainee in 1977, his father advised him to start a recurring deposit of Rs 100 a month. The chairman and managing director of PSU Bank recalls how difficult it was to spare Rs 100 out of his monthly stipend of Rs 700. "After paying the rent and basic living expenses, I was left with barely anything," he says. It was only years later when the deposit matured that X realised the wisdom of his father's advice.Now, 37 years later, the veteran banker is proffering the same advice to his children. "But instead of putting money in recurring deposits and bank FDs, they want to invest in SIPs (systematic investment plans) of mutual funds," he says, derisively.

In Pune, Mr.S gets a weekly sermon from his father Mr.A on why stocks are not good for his financial health. The senior Mr.C’s aversion to equities is rooted in his own experience with the asset class. He invested in the stock markets in 1991 and lost heavily when the Harshad Mehta scam sent the market into a tailspin in 1994. Like Mr. X's children, Mr.S too is not following his parent's investment advice. "The stock market has changed drastically since the time he was an investor. It is well regulated and the possibility of fraud is significantly lower," says Mr.S. The younger Mr.X understand that recurring and fixed deposits are very tax inefficient compared with debt mutual funds and fixed maturity plans (FMPs). Even though the Budget has changed rules, long-term investors in debt funds and FMPs still enjoy a significant tax advantage over bank deposits.

Parents mean well, but the financial advice they offer to their children today is often flawed. One can't really blame them be-cause they lived in an era which was very different from the present. Back in the 1970s and 1980s, the stock market was an opaque establishment, mutual funds were unknown and insurance agents were trusted advisors. Life insurance policies, bank deposits and small savings schemes were the instruments that helped them create wealth in the past.

A major problem with parental guidance is that it doesn't match the expectations of the younger generation (and not just when it comes to investment!). A young person may wish to put money in an equity fund SIP while her father insists that the Public Provident Fund is a better and safer option.

"Parents often take upon themselves the investment decisions of the earning children even though the risk profiles of the modern youth and that of the parents could be vastly different," says Uma Shashikant, financial trainer and managing director, Centre for Investment Education and Learning. Gen Y investors are at the greatest risk. Some two out of every three professionals aged 21-27 years base their financial decisions on his parental advice.

Traditional life insurance policies are an all-time favourite investment choice. It's common for parents to buy an insurance policy for their child as a gift, paying the premium in the initial years. Once the child starts earning, the onus of paying the premium shifts to him. Parents might think they are giving their child a great gift. In reality, they are saddling him with a sub-optimal investment for the next 15-20 years.

Mr.N, a public sector unit manager pays almost Rs 1 lakh a year for seven life insurance policies that give him a combined life cover of Rs 14 lakh. Two of these policies were bought for him by his father. He repeated the mistake by buying two policies for his children. The traditional insurance plans fall between two stools, offering neither good returns nor adequate life cover. Mr.N realised this and bought a pure protection term plan of Rs 50 lakh for himself. He still feels shackled by the premium that flows into the other seven policies. To be fair, not all the financial advice given by the older generation should be ignored.

In fact, some time-tested tenets can ensure prosperity. Mr.J’s father did not tell him where to invest. "He just said instead of saving what is left after your expenses, you should spend what is left after you have saved for the month. It's a golden rule I have diligently followed," says the Hyderabadbased IT professional. Similarly, the deep aversion the older generation has for discretionary spending and debt can have a positive influence on finances of young set. Though not all forms of debt are bad, living beyond your means and over-leveraging your income are surefire ways of falling into a debt trap.