Do you also believe that Indians are shifting their investment preferences to mutual funds and shares? Let us take a look at what the Reserve Bank of India’s research report says. RBI data 1997 to 2016 (click to download) shows the savings habits of Indians.
Columns (2) to (7) are low risk investments such as investments in banks, post office, provident fund and life insurance; while columns (8) to (12) show high risk investments such as shares, debentures, chit funds and mutual funds. In Column (7) we have shown the percentage of all low risk financial investments to total financial investments. And in Column (12) we have shown the percentage of all high risk financial investments to total financial investments. The data in the Table is given for 20 years. In these 20 years never have Indians invested more than 9 % in high risk investments. The years 1999-2000 and 2015-16 are the only 2 years where the high risk investment has touched a high of 9 %. Otherwise it has mostly been in the range of 5 to 7 % . In one year the high risk investment was 1 % of the total savings of Indians!!!!! Remember the data is from the most authentic source of information on such matters – the Reserve Bank of India.
Question to ask
Are Indians fools to invest such large percentage of their savings in low risk investments? Or are they financially illiterate as most articles in press and talk shows on TV tell us? The corollary to this line of argument is that low risk means low returns and therefore why should one invest in low risk, unless the person is a fool or financially illiterate?
Economics is a normative science. We should take data for what it represents, not how we want to interpret it and certainly not on the character of the investor or the the quality of the investors’ education. To say the least this is a condescending approach and I find it very insulting. Day in and day out we are told that Indians are too traditional and will follow the footsteps of their father and grandfather and will not take up anything new. If we look at the number of start ups that are coming up we get an idea of how Indians embrace new things in their lives. Or if see the the changing pattern of cultivation in terms of the crops, or the technology that is used for cultivation, we understand how much the so-called illiterate farmer goes kin for changes and new things. To classify the preferences of the investors as illiteracy or foolish is very insulting.
The RBI savings data shows a very strong preference for low risk investments. This is called investment behavior. There should be no further analysis or stretched imagination. If at all one wants to understand why people prefer low risk investments in such magnitude, we should look at science for answers not irrational imagination. Reason and rationale tells us that individuals have a limited span of time of productive life, during which time they can earn their money. Most people for instance retire at age 60. They have no hope of earning money after that. If suppose they lose money invested in high risk investments at age 50, the remaining 10 years of productive life is too short a period to make up the money lost and also to increase the the size of their investment portfolio. On the other hand the company’s time frame is infinity – that is they will exist forever. So companies have better options to make up for the money lost.
Answer to give
Individuals who invest in low risk investments are neither fools nor illiterate. They are wise and prudent financial investors. They are aware of the risks of investment in high risk investments and have wisely decided to protect their money.
A Challenge
When you meet your next 10 customers, ask them where they have invested their money. How much in banks, post office, provident fund and life insurance? And how much in chit funds, shares, debentures and mutual funds? Whether you are meeting a rural customer or an urban customer or whether you are meeting a metro town customer, the answer will be approximately what is shown in the Table above.
Lesson
People invest in low risk investments because they want their money to be safe and secure, knowing fully well that that money once lost can never be recovered within their life time.
Keep coming back to this blog. You will keep getting a lot of information that you can use in your sales activity.
Good Morning, Sir,
Read both the blogs-” Sales process” and “Where Do Indians Save Their Money?” I liked the way in which you have put forward the realities and more so the powerful sentences and blunt views used like, “To say the least this is a condescending approach and I find it very insulting.” and “To classify the preferences of the investors as illiteracy or foolish is very insulting.”
As far the risk associated with high risk investment let me share with you my own experience. Having worked in LIC for over 40 years and retired in the cadre of Sr. Divisional Manager, out of the kitty received on retirement I invested almost more than 98% in low risk investment but as a layman put Rs. 5 Lakh with a builder for 3 years as FD with 12.5% interest for 3 years. It was sheer out of temptation. Now the builder, one time most reliable and respected builder, is on the verge of declaring bankruptcy and I have lost all my hopes to recover even the principal… forget the interest which is overdue since January 2017. There are thousands of depositors like me who have put their lifetime savings with the same builder. Much has come in press as well as media but people’s memory is short lived.
Sir, very useful information in both the articles. Please keep educating financially illiterate like me.