Why You Should Not Depend on Friends And Relatives for an Investment Advice

December 11, 2021 Mutual Fund

Investing is crucial for an individual to maintain a financially secured future. Gone are the days when one could rely on savings and fixed deposits as financial security.

In today’s world, many of us may have experienced that life may throw curveballs when we least expect it. The financial difficulties faced by many, amid the COVID-19 pandemic was a lesson for the people to be financially prepared for the future.

The risk is still imminent with the virus mutating. The new ‘Omicron’ variant –classified as a ‘variant of concern’ and ‘High-Risk’ by the World Health Organisation (WHO)–could weigh down on economic activity and personal financial stability of many of us.

It is possible that returns on investments, particularly from market-linked instruments, may take a hit. The fortune of some market-linked investments such as mutual funds, stocks, bonds, etc. depends on the prevailing market conditions. You must have a holistic understanding of the macroeconomic undercurrent that could hamper your investments.

You cannot be relying on friends and relatives for investment advice – as what is best suited for them may not be best suited for you. When you invest in any financial product, it is necessary to assess your needs, investment objective, risk profile, the financial goals you’re addressing, and the time-to-goal. You should be able to bear the risk the particular investment option carries, and have a reasonable investment horizon that is required to gain returns to its full potential.

Investments if planned suitably may help you to achieve some of your envisioned financial goals in life, such as children’s education, wedding expenses, international vacation, luxury car, dream home, etc. While you have the option to choose from various financial products such as Mutual funds selecting the worthy and suitable ones for your portfolio is the crucial part.

You see, not everyone is equipped with financial knowledge and some may lack financial literacy, which lowers their competence to provide a piece of prudent investment advice. Although nowadays information on financial markets is easily available through various sources, don’t make the mistake of copying or mirroring someone else’s investment portfolio.

Most people are happy to dish out advice, whether useful or not. Sometimes it’s too tempting to resist taking advice from people who swear it has paid off for them. This is especially common in the case of financial advice from friends and relatives. Several studies in the field of behavioural finance exhibit that peers can influence your market participation and investment decisions. Investments come under the ambit of your personal finances, hence people tend to rely on close friends or relatives for advice regarding saving and investments. Whether it’s a friend recommending a winning stock or an older relative telling you to invest in a rewarding mutual fund, which gave him optimal returns.

No matter how much you connect with your friends and relatives, investing is an individualistic exercise, which should be based on your suitability. Remember, One man’s meat is another man’s poison. There is no one-size-fits-all investment plan.

In this fast pace fintech world, you are surrounded by various resources such as Robo-advisory platforms/apps, wealth management or SEBI registered investment advisory firms, financial planners, mutual fund research houses, etc. who can guide you with investment planning exercises with the needed convenience and ease. It’s not bad to try DIY investing or start investing online, you just need to focus on some essential parameters and do thorough research before investing. Simply seeking investment advice from friends, relatives and neighbours, is not the right approach towards investing.

Recently, I received a call from my friend Neha. She said, “Mitali, I had made an investment in a balanced advantage mutual fund scheme suggested by my friend and it has earned me significant returns. Later he suggested me another equity-oriented scheme that invests aggressively into equities to clock higher returns, but when the market crashed amid pandemic, my portfolio suffered a huge loss; eroded my capital as well.”

To this, I replied, “Neha, equity as an asset class is considered to be risky and highly volatile. When the scheme suggested by your friend gave you decent returns it boosted your confidence in his investment recommendation and then you made another investment without recognising the risk involved by yourself. You need to understand that every mutual fund scheme has different risk-return characteristics suitable to a certain type of investor – his risk profile, investment objective and investment horizon. Did you gauge that?” It is not necessary that you have a similar risk appetite and investment objective as your fellow investors.”

In the above-mentioned case, Neha could have saved erosion of profits made and the capital, if she had done thorough research about the mutual fund scheme’s investing strategy and risks traits. If she had understood her own risk profile, she could have avoided the loss suffered. Investing is an individualistic exercise and a process, which if well-planned, reaps a sweet fruit. However, if you overlook the nuances and risks involved, it may result in a fruitless journey with no achievements.

My experience says many first-time investors seek counselling from friends or relatives to make investments without fully understanding the financial product, risk and return trade-off, their personal risk profile, the investment objectives, their financial goals, and investment time horizon. Need-based evaluation and risk profiling are the initial steps required before you take any investment decision. You should invest in asset classes (equity, debt, and gold) and investment avenues therein that are best suited for you. You need to make a wise choice while investing your hard-earned money and be a responsible investor.

To make a wise choice and be a responsible investor, you must be empowered with adequate financial knowledge and be aware of the macroeconomic environment and should be able to filter out worthy information from the deep ocean of financial information and make well-informed investment decisions.

Lack of financial literacy has always exhibited that many investors invest based on some advice given by fellow investors, especially friends and relatives. Don’t do that, instead sharpen your financial knowledge, be financially literate, become your own financial planner, and brighten your financial future. Be your family’s financial guardian.

This article first appeared on PersonalFN here