Teaching Your Teens to Invest: Three
Basics to Get Them Hooked! Saving, and investing, are largely habitual
behaviours. Which means they need to be formed when children are still
impressionable. And wealth building is a more evolved attitude altogether. Unfortunately,
most of us learn this difference only in our late twenties or early thirties,
when we realize that living by the mantra of savings = earnings-expenditure is not going to take us very far. Of course, in india, most children don't
work summer jobs or side jobs while studying like they do abroad. Which means
that they can either save from their allowances or start doing odd jobs at home
to earn a bit extra. Although this may not mean a big enough amount in regular
investments to begin with, it can still be enough to help form the right
habits. Some parents even offer to match by 50 or 100% what the children save
themselves, so the incentive to save is that much higher. Let's look at three conversations you can
have with your 'young adults' to equip them with constructive and positive
money habits at the right time. The Power of Compounding Not just kids, learning about compounding
is a fascinating exercise for most adults as well! for example, did you know
that even a 5-year difference in the period of investing can make a difference
of crores to your retirement fund? Here's how: Amount
invested: Rs. 5000/month Bank
Recurring Deposit Rate of Interest: 8% per annum Mutual
Fund Systematic Investment Plan (SIP) Rate of Return: 12% per annum
|
When You Start Investing at 30 |
When You Start Investing at 25 |
|
Total Principal Invested |
Value of Bank RD |
Value of SIP |
Total Principal Invested |
Value of Bank RD |
Value of SIP |
At 40 years of age |
6 lakhs |
9.21 lakhs |
11.62 lakhs |
9 lakhs |
17.42 lakhs |
25.23 lakhs |
At 50 years of age |
12 lakhs |
29.65 lakhs |
49.96 lakhs |
15 lakhs |
47.87 lakhs |
95.88 lakhs |
At 60 years of age |
18 lakhs |
75.01 lakhs |
1.76 crores |
21 lakhs |
1.15 crores |
3.25 crores |
Now, let's assume your child starts saving at
age 15, with rs. 1000 every month. If you get them to invest in an equity
mutual fund sip, by the time they are 25 they would have accumulated Rs. 2,35,855 at 12% returns. At this
point, they would most likely have a job and would be able to start saving more
- say Rs. 5000 a month. When we add this corpus (rounded off to Rs. 240,000) to the principal
in the above example, here's how much the numbers change:
|
Enhanced Investing at 25 |
|
Total Principal Invested |
Value of Bank RD |
Value of SIP |
At 40 years of age |
11.4 lakhs |
25.21 lakhs |
38.19 lakhs |
At 50 years of age |
17.4 lakhs |
63.81 lakhs |
1.3 crores |
At 60 years of age |
23.4 lakhs |
1.47 crores |
4.17 crores |
Amazing, right? Compounding is thus not
only fun, but probably the most powerful way to teach your children about
wealth accumulation. Risk and Return This example is also a great way to explain
to them about different investment options like bank deposits or mutual funds,
and why they offer such different returns. Help them understand that in investing, risk means the possibility of losing some or all of their money, and that riskier investments offer greater returns than safer bets. These fundamental concepts will play an important role in their decision making as they go on. Talk to them about different investment
products like stocks, bonds, mutual funds, bank deposits and even providend
fund accounts to give them a good initial understanding of when each option would be most appropriate. in most cases, your
teen would probably be the most excited by stocks and the promise of
exponential returns. Tell them about the concept of risk adjusted returns, which is essentially assessing whether the
returns on a particular investment are worth the risk we're taking. While it is
a technical calculation that most of us would never make ourselves, it is an
important concept that teaches us to assess risk and return together - and not
just the potential returns. Long Term Investing Fact 1: Teenage investors, with over 50
years of compounding ahead of them, have the greatest advantage of time. Even
if they cannot invest huge amounts of money. And even if they cannot make
glamorous bets on high growth stocks. Fact 2: Almost all markets have moved
upwards over the long term. Which means that all your teenager needs to
do to accumulate wealth is to make a few sensible initial investments, and
stick with them through short term market swings without giving in to fear or
temptation. The following chart of the bse sensex over the last 30 years should
help drive home this point:  Source: Bloomberg,iFAST Compilations The low points in 2008 and 2016 should help
illustrate the fact that investors who stuck to the course despite making
losses would go on to not only recover, but increase their wealth in multiples. Conclusion On average, our children are studying more
and starting off with higher paying jobs than we did. They also face family
responsibilities later than we did. This means they have a real opportunity to
start creating wealth as soon as they start earning. So even as they dream of
annual backpacking trips across europe and new zealand with their friends, it's
only deeply ingrained habits of saving and investing that will keep them from spending
away their precious all! Disclaimer ifast and/or its content and research team's
licensed representatives may own or have positions in the mutual funds of any
of the asset management company mentioned or referred to in the article, and
may from time to time add or dispose of, or be materially interested in any
such. this article is not to be construed as an offer or solicitation for the
subscription, purchase or sale of any mutual fund. no investment decision
should be taken without first viewing a mutual fund's scheme information
document including statement of additional information. any advice herein is
made on a general basis and does not take into account the specific investment
objectives of the specific person or group of persons. investors should seek
for professional investment, tax, and legal advice before making an investment
or any other decision. past performance and any forecast is not necessarily
indicative of the future or likely performance of the mutual fund. the value of
mutual funds and the income from them may fall as well as rise. opinions
expressed herein are subject to change without notice. please read our
disclaimer on the website. |