Many investors chase returns, without analysing the risks, says Dev Ashish, a SEBI registered investment advisor, and Founder, StableInvestor.com.
In an interview with MintGenie, Ashish said that new-age investors feel drowned in just too much information.
Edited Excerpts:
Q. Financial literacy is missing in our school curriculum, thus, depriving people of the necessary financial knowledge. What is your view on the same?
As people age and eventually become more and more aware of the far-reaching consequences of financial illiteracy, they start to question why isn’t something as important as personal finance, taught in school. And rightly so.
One of the most important but missing pieces of the Indian education system is financial literacy. While the system is quite rigorous and competitive when compared to other countries, it fails to prepare young minds for the major financial decisions that they would be taking in a few years’ time and which will impact them for the rest of their lives.
Given that most people primarily get higher education to find work and then earn money for decades, it is only justified that some importance be given to teaching them how to properly handle their money.
In my view, financial literacy is a crucial life skill that everyone needs to learn. Unfortunately, this is overlooked in schools today. Schools today are focused single-mindedly on getting kids to get more marks. As a result, they do not give sufficient time to the development of other real-life skills, financial literacy being just one of them.
The very basics of real financial literacy should be made part of the school curriculum for at least classes 9-12 and then, the concepts should be advanced further at graduate levels. As of now, very little is taught about things like simple and compound interest, loan, and repayment principles, and that too in a theoretical formulae-based approach instead of a practical aspect.
As a result, it is no surprise that many smart and well-educated youngsters joining work have absolutely no clue about how to manage money or take financial decisions objectively.
Q. What are the critical aspects of financial literacy that we cannot afford to ignore for a secure financial future?
A solid understanding of the basics of personal finances is extremely important. This may include but is not limited to – understanding how and why compounding (compound interest) works better than simple interest in the long term, and understanding the impact of having a high savings rate on long-term wealth. Apart, why one shouldn’t spend recklessly, how loans work and how the dynamics of principle & interest change across loan tenure, and the importance of insurance to cover the risk of life and which options are available.
More importantly, why certain options are more suitable (like term plans) and others aren’t; why health insurance is needed even if one is healthy now, why to set aside funds for emergencies, how and why to avoid high interest loans and understanding how to use credit cards (which most youngsters will anyways use in future); how to know what are the incentives of those selling financial products and how to avoid being duped by get-rich-quick schemes.
Q. Do you think new-age investors are more informed about various investment options than their predecessors? Also, what do they lack when it comes to planning their finances?
While it is true that new investors are much more informed than previous generations because of the democratization of information availability, it is also true that they are drowned in just too much information. There is just too much noise out there masquerading as financial advice. And since these new-age investors have no solid understanding of financial concepts and what is right and what isn’t; they are unable to filter out the noise or pick the right information.
As a result, they fail to recognize when they are being marketed to and when they themselves become the product! It might sound harsh but that is the truth. The ability to identify when you are being taken for a financial ride is what financial literacy can help you avoid.
Q. How do you advise people to plan their personal finance goals?
It is good that you asked about goals first. And that is how it should be. People wrongly start their financial journey looking to pick the best financial product. But the correct approach is to have a goal-based lens and then use that lens to evaluate and pick the most suitable products
To plan for personal financial goals is not that difficult or does not require any degree in rocket science. It’s pure common sense. Here is how I will advise a youngster to go about their planning –
- Buy a plain term life insurance at the earliest. Don’t wait to age up, get married, take a loan to buy a house and have kids and then buy insurance. Buy it first. And only go for a term plan like coverage. Avoid endowment, and moneyback plans like a disease.
- Do not just depend on your employer for health insurance. Eventually if not immediately, get yourself personal health insurance coverage.
- Slowly put in place a buffer for emergencies. Popularly referred to as the emergency fund or a rainy day fund, it should be large enough to take care of at least 6 months of your expenses.
- Make sure you understand in spirit that you need to spend less than what you earn. In fact, the bigger the gap between income and expenses, the better it is.
- For short-term goals (say up to three years), start saving money in debt instruments like RD, FD, debt funds, etc.
- For long-term goals (those with timelines longer than five years), it is advisable to invest a large portion in inflation-beating equity instruments. And the best way to do it is via equity funds. Direct stocks look glamorous but for most people, equity funds offer higher chances of financially successful outcomes in the long run.
- If you plan to take a loan, then ensure your EMIs are not more than 30-35 per cent of your monthly income. And don’t use up all your savings to make your downpayment.
Q. Wealth creation is an important goal. What steps should one take to achieve the same?
Wealth creation is of course an important goal. Not just for the money part but because it offers a different type of freedom if you have a decent amount of money with you. And for most, it will be a long journey. It is fairly simple but not easy as most people don’t have the kind of patience it requires.
While other asset classes have their own benefits, eventually, equity as an asset class is most people’s best bet for sustainable long-term wealth creation. Agreed that equity is volatile in the short term. But the long-term trajectory is upwards and beats inflation hands down!
So if wealth creation is what one wants, one should make sure to increase their equity exposure. If just starting out, the allocation can be small but as time passes by and the investor becomes comfortable with equity and its ways, it’s best to increase exposure to equity at an overall portfolio level.
Q. Given the inherent market volatility, many investors are unable to earn desired returns as planned. What would be your advice to them?
Equity markets don’t offer returns on demand. And that is what people need to understand. When we say equity can give 11-12 percent (and even higher) average returns in the long term, that doesn’t mean that you will get 12 percent every year. It may mean a sequence of +14%, -6%, +28%, -13%, and +47% over a 5-year period.
Most investors don’t get this and as a result, give up and exit at the wrong time. As a result, they don’t get the desired and expected returns that they came in for.
My advice to such investors is to have patience first of all. It is not going to be easy but it is necessary. Also, if you really have trouble managing your investment behaviour and get emotionally driven at times, then it's best to get professional advice from SEBI-registered investment advisors. That way, you will have someone who can objectively handhold you in tough times so that you don’t deviate and then, lead you to the desired investment outcomes.
Q. One of the reasons for financial ignorance is accumulating too much debt. What do you tell debt-ridden people relying on loans to make more money or for immediate gratification?
While some people are comfortable carrying loans, there is a vast majority of us Indians, who have this get-loan-free-quickly mentality engrained in our DNAs. And rightly so. If we look at many so-called developed nations, it seems that reckless borrowing and credit behaviour are what bring down people financially.
So, it is always advisable to be prudent when borrowing. Better to be conservative.
For unsecured loans like personal loans and credit card debt, it is best to avoid them first thing. But if you have no option and have to borrow, make sure you don’t borrow unnecessarily and for non-critical discretionary expenses. These days, lenders will make it seem glamorous to borrow (and upgrade life and do what not). But at the end of the day, a loan is a loan and the lender is in the business of profit. So, each rupee you borrow has to be repaid back in the future and with interest. So don’t borrow unnecessarily just because everyone else is doing that.
Secured loans like home loans are necessary evils these days. Everyone wants to buy a house and almost everyone cannot do it without a loan. Now even though effective home loan rates (after adjusting for tax benefits) are a lot lower, that doesn’t mean you borrow too much.
So even for a home loan, borrow what is necessary and an amount for which you can service the EMIs comfortably. And if you intend to get rid of the loan quickly, then be willing to make periodic prepayments via regular income as well as annual incentives/bonuses.
