How to convince your parents to invest in a mutual fund

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The relationship between mutual funds and our parents is similar to that of any typical Bollywood movie’s hero and villain. With the mutual fund industry emerging in the late 90s, you cannot blame the hatred, or, the ignorance of our parents, to the concept called mutual funds. For every parent, “savings” as a concept is defined by or synonymous to fixed deposits, provident funds, public provident funds, national savings certificates, pension schemes or national savings schemes.

Is there any difference in these instruments? Yes, returns, tax savings, lock-in but one thing that is common amongst all is the “guaranteed returns”.

The older generation is always skeptical about risk in their ‘mehnat ki kamayee’ (hard-earned money), and, therefore, they might always settle for low returns but shall never opt for investment that has a degree of risk in it.

So, how to really convince them into investing in a mutual fund?

1. Let us start with tax savings because when we talk numbers, we might catch their attention. As much as we love our country, nobody likes tax deduction on any income, irrespective of the generation. If we take an example of the favourite fixed deposit, the income generated on it is taxed on the basis of the slab rate in which the individual subsides. Therefore, if an individual is in the 30% tax bracket the FDs will be taxed at the rate of 30%. Moreover, it is not just the income that is taxable, the entire amount invested along with the interest earned is taxable. On the contrary, if an individual opts for a mutual fund scheme, the investment is termed as capital gain, to which the tax rate is a modest 20%.

Figuratively if Rs 50 lakhs are invested for 10 years in a fixed deposit, it will fetch you approximately Rs 35 lakhs which will attract tax at the rate of 30% equaling to Rs 10.5 lakhs. The same Rs 50 lakhs invested in a debt mutual fund might fetch an 8% annualized return which equals approximately Rs 1.07 crores. However, on account of indexation benefit, the actual profits rise to Rs 10.31 lakhs, which makes the total tax amount incurred Rs 2.06 lakhs.

Sounds good? Let us go ahead then

2. Let us break the myth of mutual funds and the stock market because a mutual fund is much more than just an investment in equities. Since their emergence, the mutual fund has tried to attract every possible investor, by providing investment options from not just equities but also, debt, bonds, government securities, commodities, gold, and other bullion, etc., Therefore there is always something for every individual, be it risk-averse or moderate risk-taker. Now considering our parents are always the risk-averse types, they have the options available of debt funds, gilt funds, liquid funds, hybrid funds, etc.

3. So why mutual fund then? The best possible answer is the optimum risk-reward ratio. A fixed deposit or a provident fund will restrict your earnings to 5-6% returns, however, a mutual fund might help you garner above 8% with slightly higher risk compared to fixed deposits or PF. Under fixed deposit, the returns are guaranteed irrespective of market conditions. However, with the inflation rate hovering around 7%, any return below that level is not going to be sufficient for catering to your future needs. In simple terms, returns below the inflation rate will erode your purchasing power and thereby make your savings insufficient to reach its desired goal.

4. Lastly, you can begin with any amount. The amount is as low as Rs 500 and the entry and exit are as simple as discontinuation and/or resumption of your milkman. As complex as the word mutual fund may sound, it is probably one of the simplest investment categories. If you want to create an FD in X bank, you have to complete the KYC process and deposit the amount. However, later on, if Y bank’s interest rate attracts you, you cannot switch and might have to do a lot of paperwork again.

In a mutual fund, once your CAN (Common Account Number) is generated, you can switch, enter, exit, stop, resume, stop and re-enter again during your entire lifetime sitting anywhere in the world, with the security of an OTP authentication.

Keep in mind

Convincing your parents for investing in mutual funds may not seem like a necessity for many, however, one must not forget two things

1. The investment your parents make may not deem sufficient to carry themselves independently. As a result, at some stage, they may become dependent upon you, which will eventually affect your savings structure. In society we may never feel our parents as a burden on us, however with all the financial planning one may carry, it would be very unjust not to fulfill it just because of your parent’s lack of knowledge about inflation and mutual fund.

2. Secondly, as a matter of cherry on top, if your parents get convinced of the idea, there might be high chances that you would end up inheriting the remaining funds after their demise. A far-fetched thought, but also a realistic one, because who doesn’t want that extra money in your retirement.