In this article, Mukesh Dedhia CA, CFP, LUTCF - Director, Ghalla & Bhansali Securities advocates passionately the cause of financial literacy
Indians are amongst the highest savers but are either averse to taking risks for earning potentially higher returns or remain blissfully ignorant about the potential of equities as a class to grow wealth. Indians save about 32 per cent of what they earn. But their exposure to financial instruments having the potential of higher returns is still very low.
While investing, an Indian investor searches for high, guaranteed returns with no risk or low risk, & high liquidity. But as we know “only high risks can get you high returns”. Risk & returns are interconnected. The returns on investments are proportionate to the extent of risk taken. When it comes to investing, the Indian investors are a bit risk averse. But risk aversion exists even in more matured markets. As per a recent survey by the Wall Street Journal, Europeans are the most risk-averse. They rank even above Indians when it comes to going for safe and guaranteed returns.
Research shows that about 65 per cent of what Indian investors save is in liquid & safe assets like cash, deposits, post office savings etc. Another 23 per cent is invested in physical investments like property and gold & only about 12 per cent is directed towards equity, a growth-oriented financial instrument.
Equities have the potential to perform exceptionally well. In the five-year period from 2003, Sensex, the sensitive index of the Bombay Stock Exchange, rose about seven times. These five years saw a phenomenal bull phase and the major beneficiaries of the increase in equity prices were the foreign institutional investors (FIIs). By and large, Indians remained on the sidelines during the bull phase. Many realised the potential upsides in equities by the end of 2007 and flocked to the market. But the entry in late 2007 and early 2008 was ill-timed. In mid-2008 equity prices fell sharply following the global trend triggered by the credit squeeze and subsequent collapse of large financial institutions in the US. In retrospect, it would appear we were foolish in our investment decisions.
Going forward, looking at the India growth story, such bull phases will certainly occur time & again. Let’s make sure that the Indian investor does not miss the opportunity this time….!
But for that to happen, financial illiteracy will have to be overcome. Just how rampant, financial illiteracy is evidenced by the following:
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Even though they may know its basics & importance but hardly 50 per cent have an insurance policy.
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Among those who have a policy, most have taken it only for tax purpose or some investment purpose, forgetting insurance’s real purpose is risk cover. Hence many are inadequately covered.
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Indian investors are bogged down by matters like children’s education and daughter’s marriage and not retirement planning.
Today’s complex financial services industry offers consumers a vast array of products to meet their financial needs. But individuals are found to be under-insured, over-leveraged & having excessive exposure to new funds. This is because of lack of knowledge or wrong notions developed over the years. The chances that a client may get involved in transactions which are financially destructive are more. Hence, to protect wealth from getting eroded the most important aspect is investor education.
Lack of financial prudence among individuals and instances of investors being duped are concerns shared in both the developed & developing countries. Various researches have shown that the levels of financial literacy worldwide are unacceptably low. In one of the researches, it was observed that in a developed country like Australia only 28 per cent of the respondents were able to calculate compound interest & in the US the figure was even lower at about 18 per cent. For a developing country like ours, the challenges are even more.
What are other countries doing in the area of financial education?
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Australia has launched programs like “Understanding Money” for raising awareness at schools, at workplace & at community forums. It has also launched a consumer website called FIDO (www.fido.gov.au) that provides tips, knowledge on financial products & research publications.
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Singapore has launched national financial education program (Moneysense) including knowledge on basic money management, financial planning & investment know how.
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Malaysia has launched online information channel for consumers of insurance & banking products. It provides tips on credit usage & money management.
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National Bank of Poland conducts an open day for school children. On this day, bank encourages school children along with their parents to visit the bank. They set up education village in the foyer of bank. The children & their parents visit the village which is like a fair with lot of fun things. Then they give a guided tour of the central bank to visitors & make them play games through which they learn about the central bank, its currency, monetary policy etc.
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The Austrian National Bank has developed a set of three CDs titled Money & Currency. These CDs cover the role & significance of money, financial market organizations & its role within European System of Central Banks. A quiz contest called TEMPO is created to test the knowledge acquired through the CDs.
According to the Ministry of Corporate Affairs, India will host about 3,000 investor education programmes across the country to spread financial awareness. There are even websites like iefp.gov.in, watchoutinvestors.com & investorshelpline.in to assist the Indian investor in being financially literate.
“The sea is common for all, some take pearls, some take fish and some come out with just wet legs. The world is common to all, but what we get is what we try for.” And we can try for the most, only if we have the right knowledge and right education.