Indian Investments: A Curious Case of Risk Aversion
By Havi Singh
India is a vast country and is well known for its cultural diversity. However, something that most Indians share in common is their limited knowledge in the domain of personal finance. People in India are more prone to investing in safe avenues such as fixed deposits and recurring deposits. This attitude towards investment that has been observed in the majority of the Indians, can be attributed to a variety of factors. To elaborate, let’s evaluate the scenario with respect to the case of mutual funds; which have been a part of the Indian economy since 1963.
According to a recent report by the Association of Mutual Funds in India (AMFI), it is indicated that less than 1.5% of the Indians invest in Mutual Funds. This low percentage can be attributed to the lack of awareness among potential investors. It is common knowledge that when an individual is unaware of a certain thing/phenomenon, they are more likely to believe the facts presented to them regarding the same phenomenon, without questioning their credibility. Having established this, it is now easier to understand why the majority of the Indians hesitate to invest in mutual funds; that is due to the fear of risk instilled amongst them. This fear has been raised due to lack of awareness and the emergence of hoax cases like Chit Funds and Quick Money Minting schemes in the past. Also, investing in inappropriate schemes or schemes that don’t cater to the investors’ needs, stir dissatisfaction amongst the investors, and leads to a negative word of mouth. This in turn is a failure on the part of the Mutual Fund Industry, for a slow and poor penetration in the Indian Market; along with a lack of practical financial knowledge and advisory.
The trouble with our society is that a large number of people tend to use the terms “saving” and “investment” interchangeably. They may be aware of the precise definitions, but would still weigh them to be the same. The fact is, savings would help meet an individual’s short-term financial needs, given its liquidity. But, investments would provide higher returns and lead to better capital formation. Now, the issue arises when the common people who have little to no knowledge in the field of financial awareness are exposed to terms such as “risk profile,” “loss,” “subject to market risk,” “fluctuating rates/returns” etc. Such statements lead them to believe that their money isn’t completely safe and thus choose against investing in these avenues. This is a concern that we as individuals are accountable for.
It is essential to realize that in order to create capital, property, finance/ wealth etc., we should in fact be willing to take at least a certain amount of risk; and not merely save in the safest yet unprofitable alternative. Time Value of Money is a concept that needs to be considered when saving an amount, but is unfortunately not. It explains how the current value of money is worth more than what it would be in the future. This loss can be avoided through appropriate and diverse investments. Risks would be a part of every financial decision that we make in our lifetime. However, making more aware and calculated judgments would not only help us better weigh the risks to its gains, but also fetch us more lucrative yields in the long run.
“The Placebo Effect” is a phenomenon studied under the field of psychology that addresses certain queer reactions of the human brain. It basically explains how in many cases patients report feeling better, even though they weren’t given the actual medical treatment, rather some fake pills. This shows how the human mind can trick us into believing something that we wanted to believe or expected to happen. The Placebo Effect is a one of a kind mystery concerning the human mind and reveals how certain expectations can trigger immediate responses. This analogy can be used to explain why many individuals choose to save than to invest. When a person saves a certain portion of their income, they feel responsible for having saved for their future needs. It sends across a sense of contentment and safety in the mind of the individual. This contentment turns out to be short-lived and false because the money that has been saved would lose its current value over time. Moreover, that amount of money is not adding any sort of added value to the person’s life; it is at the most keeping him/her at the same or slightly better level of utility as before. The money saved is thus acting as a placebo to the individual. Thus, the individual must invest his/her money in a scheme that would provide better returns, in order to truly raise their level of wealth.
Furthermore, savings too have their benefits and should not be disregarded. They help meet the immediate/urgent requirements due to their highly liquid nature. It can be deduced that saving an appropriate amount is essential in order to meet unforeseen financial difficulties. Nonetheless, for an individual to create wealth and sufficiently elevate their level of income and standard of living, they must dare to take risks and make investments. Once an individual is prepared to do so, they must be adequately aware of the schemes that are being offered, their own motives and survey for good financial advisory. Consequently, with appropriate financial knowledge and motives, the risks involved with most investments would appear to be far less than their prospective gains.
Our economy as a whole thus requires better investments and consecutively more awareness. One of the most promising avenues is that of the mutual funds sector, which is in dire need of a more elaborate and structured spread into the Indian Market. To bring forth this change, potential investors need to be equipped with adequate financial knowledge and advisory, along with a change in perspective towards the risks with respect to diverse investments.