Posted On Monday, Aug 29, 2016
Traditions define a culture, and we are proud of ours. Upholding traditional values while accepting modern practices is a challenge. Most of us in urban India have deftly managed the two tasks in several spheres - be it language, lifestyle or outlook. However, we are still orthodox when it comes to a crucial aspect of our lives - investing. Our attitude towards investing is largely conservative. Like most approaches, conservatism has both merits and drawbacks. We need to evaluate the two, and, if required, alter our approach in a way which is more rewarding.
Good beginning of an important journey
Conservatism has helped us take the first step towards financial well-being. It has enabled us to focus on saving. Despite being a lower-middle-income economy, India has a high domestic savings rate of ~30 percent. Traditional wisdom has taught us to save first and spend later. Borrowing money for inessential purchases is often discouraged. These practices have instilled in us a much-needed financial discipline which is often overlooked by households in developed nations.
Our traditions have helped us adopt another important aspect of investing: diversification. It's customary for Indians to buy gold on festivals and occasions. Despite our endless diversity, we are united when it comes to our fondness for the yellow metal. Almost all households - whether rich or poor - would have a part of their savings locked in gold, which not only helps them achieve diversification but also provides a hedge against inflation.
Blocks on the way
Our traditions have inculcated healthy financial habits in us. They have put us on the path of financial security. However, there is something which blocks us from achieving a larger goal - that of attaining financial prosperity. Excessive conservatism has deterred us from investing in equities - one of the most rewarding of all asset classes. The aversion is evidenced by numbers. Less than 2 percent of Indians invest in the equity markets, which is ironic considering that Asia's first stock exchange was set up in India.
What is it that makes us reluctant to invest in the stock markets despite knowing that equities deliver superior returns over the long term? Perhaps it's because we trust our traditional wisdom above everything else, and there are no known references to equity investments in our traditional rule books.
Another reason which holds us back is bitter experience. Most of us have heard stories about a distant uncle or a friend of a cousin who got swindled by rogues who promised exponential returns from stocks. Although these stories may be exaggerated, they aren't unfounded. In the past, there have been incidents in which investors have incurred loss because of misleading information and false promises given by self-styled experts, unethical management or fraudulent intermediaries.
Looking ahead instead of focusing only on the rear-view mirror
The past, no doubt, has not been very friendly to some investors. However, what we need to realize is that the present times are different. The unpleasant experiences of the past are unlikely to recur because we now have a robust regulatory institution which protects the interests of investors. The Securities and Exchange Board of India (SEBI) is the regulator of the equity markets in India. SEBI's primary role is to keep a strict check on malpractices. For this, it has enforced stringent laws which are binding on all market participants. SEBI is known to come down hard on offenders. Constant vigilance backed by strict laws has deterred malpractices in the stock markets.
Apart from a strong regulatory body, investors in India now have access to competent institutions that specialize in managing equity investments. Mutual Funds are one of the largest of such institutions. Like all participants of the equity markets, mutual funds are regulated by SEBI. There are several mutual fund schemes that cater to the varying needs of investors with an aim to help them earn decent returns while mitigating risks.
Gearing up on the path to prosperity
The presence of robust regulations and strong institutions has uplifted the standards of the equity markets in India. It's the investors who stand to benefit the most from these changes. Adopting change isn't easy, but the good part is that we don't need to change a lot. We need to continue with our focus on prioritizing savings, and we should continue with our time-tested tradition of purchasing gold. However, there is scope for reform here: instead of buying only gold ornaments or bars, we can invest in gold through mutual funds, which are more liquid (easily convertible to cash) than physical gold.
The only real change that we need to adopt is a change in attitude towards equity investments. We need to shed our inhibitions and start investing in equities. One of the best ways to begin is by purchasing mutual funds that invest in stocks of premium companies across various sectors. This task can be related to buying a basket of handpicked assorted fruits, which offers both quality and variety.
It is often asserted (and rightly so) that just half an hour of yoga everyday can significantly improve your overall health. Likewise, a small allocation to equity mutual funds can enhance your financial health. A unique blend of traditional and contemporary thoughts and techniques will surely take us a long way towards sustainable financial prosperity.
Happy Investing!Source: The World Bank, Bloomberg, Value Research
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