Common Investor Philosophy

In India, we have various investment opportunities which have different level of risk with varying returns. But, usually people have more belief on the physical assets like gold, real estate as compare to the equity. Or their majority of money is lying in the saving accounts or else FDs.

In FY 2014-15, mutual funds saw record inflows which was majorly in the equity mutual funds. However if we look at the bigger picture then only about 2% household saving in our country is allocated to equity. As compare to this, in USA, nearby 45% of household savings is allocated to equity. One can understand how much potential the Indian market still remains. But time will only tell when we will have this kind of investment in equity. Hopefully people are getting more aware now a days so soon we will be on that level.

 In this blog we will explore, why the common investor in India is averse to equity investment:

1.) High Volatile: Indian market is among one of the highly volatile markets. Their normal daily swing lies in between 2-3%. The volatility of the Sensex, measured in terms of annualized standard deviation, over the last 5 year period is 21%. For the broader market the volatility is even higher. The annualized standard deviation of S&P 500 (US market) over the last 5 year period is only about 13%. This symbolizes that our market is almost twice as volatile as the US market. Due to this high volatility, common investor relates it to the high risk and the believe that equities are very risky as an investment. In the long run if we see, Sensex has given over 16% compounded annual return over the last 10 years. However, the fear of loss of capital, keeps most investors away from equity markets.

2.) Retirement Planning based on Risk free Investment: In India, all the investment which are for the retirement like, Employee provident fund, public provident fund, life insurance policies, post office savings schemes are risk free investment. In reality, the return from these investments over the long term cannot keep pace with inflation even. As a result, many retirees face financial distress in their advanced years and have to be dependent on their children.

3.) Fantasy toward Assured Return Products: We Indians have very special love for the products which guarantee assured return. We do not care about how much percentage actually this return is. A large portion of the investor’s savings goes to his or her fixed deposit and recurring deposit accounts. People usually park their money in 3 year FD without realizing that mutual fund can give them a return which is double as compared to their FD.

4.) Lack of Financial Planning: Most of the people dont have financial plan and they believe that their finances are in their control. Therefore majority of people suffer financially. Like for any health related advice we go to a doctor similarly we should be opting for financial advice from a financial planner so that our finances are in sync. People invest mostly on an ad-hoc basis, based on advice of family members, relatives, friends and neighborhood agents.

I would like to conclude with these few lines: If more domestic savings flow to equities, then our stock market will be less dependent on FII flows and the volatility will go down. Lower volatility will attract more domestic savings flow into equity, creating a virtuous cycle. The mutual fund industry has invested considerable amount of resources in improving investors’ awareness. However, it seems that a lot more needs to be done.

If you have something to add, Please post your thoughts in comments. I would love to hear from you.

Happy Investing!!