Mutual funds have been receiving huge inflows from retail investors in India and every now and then, milestones of assets under management (AUM) are being celebrated. And why not? Finally Indian investors are shifting to financial assets. But is this move to financial assets done with proper understanding and planning? An 80-year-old relative whom I met recently told me about how he had moved more money into mutual funds because interest rates on traditional investments were falling. His portfolio consisted of equity funds including sector funds, mainly from one of India’s oldest fund house, which was considered “safe” to invest into, given its background. The same gentleman, on the advice of one of the biggest Indian private banks, invested into a monthly income plan to get a 1% “guaranteed” monthly dividend.
Generally, I come across two sets of investors—those who still cannot take market risk and want guaranteed returns, and those who are willing to invest into market-linked investments. Investors in the former category are willing to invest into company fixed deposits and chit funds for surety of returns, but will hesitate to invest into mutual funds.
The common mistake between the two categories of investors really is investing mindlessly, i.e., not knowing why and what you are investing the money for.
Typically, most investors invest first and then decide on the use of the invested amount. This leads to wrong investments being chosen for goals. For that matter, how many investors know their financial goals? Many of those who know their goals, do not know how much they need for the goals or how much to save for the same. At financial education sessions, when quizzed on their goals, the common response I receive from most participants is that they want to buy a house or plan for children’s education, but they do not know what amount is required for the same. For example, the individual knows that he wants to buy a flat worth Rs80 lakh but he does not think about the amount to be saved for down payment. Most participants are also not aware of current inflation rate or the fact that they need to beat inflation. All this leads to the investments being chosen randomly without any financial planning.Choosing the current trending investment is another example of investing mindlessly. I routinely get asked about bitcoins given its enormous returns this year. I am also increasingly meeting investors who have moved from fixed assets to financial assets, driven by what they have heard from their friends or colleagues on past performance of these investments. People are investing in systematic investment plans (SIPs) based on the past 1-3-year returns and with an expectation of assured returns of 15-18% per annum, over a 2-3-year holding period.
Over the years, insurance products have been invested into mindlessly, mainly for tax benefits. If investors had calculated the returns from investment-linked insurance policies, I doubt they would continue to invest in such products. Inflation, too, is seldom thought of or taken into account while buying policies, else people would not continue investing into policies, which at maturity hardly help in paying for any of their financial goals.
Investing without understanding the risks associated is a recipe for disaster and it has been seen in the past that once these investors burn their fingers, they invest in instruments with sub-optimal returns, as a result of which they don’t have enough for their life goals.
Yet another instance of investing mindlessly is checking prices often. Recently, at a corporate session, one of the attendees mentioned how her colleagues have set up price alerts on their phones and keep tracking net asset values (NAVs) of mutual funds on a daily basis. Such investors tend to focus on short-term price movements and react to market news by switching their investments between funds. Many pages and groups have sprung up on social media platforms, which vehemently discuss price movements of various funds daily. It is almost like mutual funds are being used for trading instead of long-term investing and it’s a known fact that trading does not give consistent returns.
Low levels of knowledge about working of financial instruments is the key reason for investing mindlessly. Given that investors are not inclined to reading about or doing research, the regulator will have to take a few steps. First, the risk disclaimer associated with all financial instruments should be in simple language and easy to understand for investors. Further, the pros and cons of market-linked investments should be highlighted in advertisements by the regulator.
Second, most customers get confused on how to invest in a mutual fund and the good practices to follow while investing in funds. Towards this, the Association of Mutual Funds of India (Amfi) can emphasize the benefits of long-term investing and can concentrate their advertisements on a few categories like balanced funds, equity-linked saving scheme (ELSS) and SIPs, as a tool to invest into these funds. There is little knowledge on debt funds and this too needs to be given attention to in educational campaigns. The investor awareness programmes by mutual funds need to be more holistic; these need to educate on financial planning instead of covering only benefits of mutual funds.
On their part, mutual funds could promote more goal-oriented schemes targeted at common financial goals like retirement planning and children’s education planning. This would make goal planning easier for individuals and stop them from investing mindlessly.
Mrin Agarwal is financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra
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*Photo credit: iStock
Source: Article written by Mrin Agarwal in Livemint on Oct 30, 2017
Original article link: https://www.livemint.com/Opinion/EPORRmmcKx5wDnHWhsbQpM/Pay-heed-to-what-you-are-buying-and-why.html