When an actor overacts he kills the character, the dialogue, the screenplay and all other accoutrements. A similar malady seems to have struck at the heart of the fund management industry. This is like a time bomb ticking along even though most of the people are oblivious of it or like to remain so despite the knowledge. This is the perfect proverbial example where long term interests are sacrificed at the altar of short term interest. I am talking about the perception of risk of equity markets. In my workshops, I ask people to raise their hands who see para-gliding as risky. Some 10% hands go up. In modern day India, people are getting adventurous which isnt a bad thing. If at all, it is a sign of an evolving nation moving from its developing status to perhaps a developed status (at least attitudinally). Then I ask another question. Raise your hands those of you who consider investing in stock markets risky. A whopping 50% of hands spontaneously go up. This is stark reality or should I say a tragedy emerging as a result of mis-selling. This is a telling example of the state of mind towards investments in equity markets. While we may be busy constructing newer and more complicated products, the people our there dont even want to touch us with a bargepole. No wonder in a country where the median age is 28, the average age of mutual fund investors are above 40. How can one reconcile such a dichotomy. In a country where equity penetration is abysmal these signs dont augur well for the future despite the fact that massive investment potential remains untaped. What has caused this situation? Lack of education is at the heart of it. It is indeed an irony that while scores of people join TCS, HCL, Tata Motors, NTPC etc and stake their entire lives for these companies, they are hesitant to invest in the shares of these companies. That is what they seem to convey when they express their risk aversion for equities. While funds may have given fantastic returns in the long term, investors have not got returns anywhere in the vicinity of these returns. Quite obviously because people entered and exited the markets at the wrong times either because of greed or fear. And also sometimes because of incompetent advice. Even though a difference of 7% ( 8% for FD and 15% for Mutual Fund ) between a fixed deposit and a mutual fund may be substantial it yields a difference of just Rs 2 lacs over 10 years for a Rs 2000 SIP. This difference increases to 18 lacs in 20 years and 108 lacs in 30 years. So while compounding does create wealth it also needs good doses of time and patience. As against this reality every mutual fund seller and investor expects to see great returns over a short period of one to five years. While this may happen at times due to the volatile nature of equity asset growth, one cannot set this as an expectation. A high return over the short term should prepare the investor for a drought like situation in the near future. This can happen through right selling and proper education. Over here one cannot but emphasise the need for setting accurate expectation levels of investors. Dreams are fulfilled but after sweating it out. Nothing comes easy in life. These are some of the reasons why the potential investor overplays risk in equity market investment. While he may be flying in a passenger aircraft, it appears to him that he is in a war plane in some battle zone. In todays prices the cost of bringing up one child is close to Rs 55 lac. While people invest a great deal of time and money in the development of their children even though there is no guarantee that all their efforts will yield good returns, they dont seem to think of that as risky. We dont even know what will happen of our jobs and of our lives the very next moment. In fact life = risk is the very essence of this argument. But still peoples risk antenna stands up only at the mention of equity investment. This situation is indeed deplorable. Nobody seems to be winning this game. All are losers in the long run. By forgoing good investment opportunities in an emerging and growing economy the people of the nation are compromising their wealth creation potential. The government loses out because the economy cannot draw enough risk capital commensurate with its capacity. Thus nation development gets impaired. Our dependence on foreign institutional investors continues unabated. Profits that our own people can earn is being enjoyed by better educated foreigners. Good Financial Education can prove to be the seed that will cause financial prosperity for the people of India. The key word here being good financial education.
Posted on: Tue, 09 Dec 2014 06:18:23 +0000
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