Last Updated on 2 years by Mohit Pareek
Before investing money, most people take investment advice, especially from their relatives and friends. With so many investment options available, people get confused.
At that time, we need someone who can help us in selecting the best investment options. Many people ask their friends, relatives and colleagues. Some also try to find answer from search engines.
Related: How to Select the Best Mutual Fund?
Money is very important for all of us. We don’t want to bear any type of loss because of our faulty decision. So, most of us turn towards our relatives and friends who is doing better in investment. According to the various survey, it is found that maximum people take advice from their relatives and friends before making any investment.
After taking so many advice, most people hardly earn enough income. According to a survey, more than 90% of investors lose money in the stock market. Forget about any profit, they lose their wealth.
According to various survey, it is found that our relatives and friends play a very important role in deciding where we need to invest our money. There is no harm in discussing with your closest one before making any investment. It is always recommended that you should learn about various investment options especially stock-market and mutual fund before making any investment.
But sometimes, this free advice does more harm than good. Taking financial advice from your relatives and friends is good but keep in mind that they are not expert.
During the period before 2008, stock-market was touching new heights. Inflow in stock-market and mutual fund was increasing rapidly. Convinced from this return many new people entered the market first time. Most of them hardly know anything about the market. So, they took advice from their relatives, friends, colleagues or another person whom they trust.
When the market is rising then every investor thinks themselves as an expert and advise their close one to invest in rising market. But the real struggle starts when the market sees some corrections.
In 2008, the stock market has shown its record correction. The price of every stock fallen down. Many investors lost more money than what they have ever earned from the market.
Akash, a businessman from Kolkata purchased shares of few companies which was suggested by his cousin in 2006. He was very happy with the return from his return. In 2008, stock-market crashed. The value of shares in which Akash invested fall down by 50-80%. He lost Rs 12 lacs in just a few months. The impact of the loss was enough for him to leave the market and from that day he never invested a single penny in the stock- market or the mutual fund.
Like Akash’s cousin, many people give investment advice to their relatives who end up losing money in the market.
Many times, we get excited from the success of our friends and relatives in stock-market. We enter into stock-market thinking that if our friends can earn then why we can’t. It is important to remember that no investment is good or bad. It all depends on your financial position and risk-taking ability.
Let us find why it is risky to take financial advice from relatives and friends.
One size does not fit all
There is no single investment which is fit for every investor. There are multiple reasons for this, but the common reasons are: –
- Financial Situation
- Risk-taking ability
- Investment time horizon
- Financial Goal
All the above reasons play a very important role in selecting any investment options.
If your financial condition is not good then the risky investment is not suitable for you. Looking only return and ignoring the risk associated with them will result in a major loss. You must invest your money in a fixed deposit or debt funds or any other fixed maturity instruments where the chance of losing your principal amount is minimum.
Even if the financial position of two people is the same then also their risk-taking ability and investment horizon may be different.
While advising friends and relative people consider a return as a sole criterion. Friends and relatives generally ignore the time-horizon and risk-taking ability of other person or fail to link their financial goal with the investment. Any financial advice without considering all the factors make the product choice completely wrong.
They are not expert.
For most people, the return on investment is the only important factor while selecting funds.
Advice from friends and relatives are influenced by their personal experiences. They are hardly aware of your financial position, your risk appetite and your investment horizon.
It may be possible that your friend is investing for 15 years and you need money in the next few months. For him equity investment is suitable but if you invest in equity-based on return then you may lose your capital. Equity is highly volatile and gives good return only in the long-term.
On the reverse side, if your investment horizon is more than 8 years then investing in the fixed deposit will result in loss of opportunity of gaining huge return on your investment.
Prashant Jain, a 24-year-old graduate wanted to save tax. He discussed with his friend who advised him to invest in PPF (Public Provident Fund).
PPF is the most popular tax-saving investment option in India. Here you can get the tax-free return and your fund is secured by the Government of India.
In India, there are a lot of tax-saving investment options available. For tax-saving investment too, your age, risk-taking ability, investment-horizon also need to be considered.
When you are young, you can take the risk. Young investors can invest in ELSS where lock-in period is only 3 years as compared to PPF where lock-in period is 15 years.
Most investment advice is based on short-term performance.
With the advancement of technology, getting investment advice becomes easier. If you had noticed then you would find that most of the advice is based on short-term performance.
If the outlook of any company looks good, then every investment guru starts advising to buy the shares of that company. On the other day, the same person tells us to sell shares of that company.
Many investors follow their advice and change their investment according to them. They forget that it is impossible to “timing the market”.
Long-term investment should not be based on the short-term performance of the market. Everyone knows that equity is highly volatile in short-run but is capable to give high return in the long term.
Instead of shifting your investment from one instrument to different instrument, you should do your research. Investing in the market without doing research increases the chance of losing money.
No one knows your financial position, your risk-taking ability better than you. It’s your money and you are responsible for all your investment decisions.
There is nothing wrong in taking advice from a person who you can trust but you have to do your research carefully. The next time when you receive any investment advice makes it sure that it works for you.