The Fact – Indians prefer low risk investments

Savings data compiled by Central Statistical Office (CSO), Government of India, and published by the Reserve Bank of India in its Handbook of Statistics, shows that without exception since the time they started publishing the data from 1970 till date (48 years, now), Indians have always put at least 90 % (except in 2007-08, when it was 88 %) in of their savings in low risk.

Misplaced I-am-right, you-are-wrong opinions

In their over-reaching chauvinism and arrogance, financial experts attribute this tendency for low risk investments to financial illiteracy (that is people are not knowledgeable about investments, as if the financial experts know!!) and an outdated mind set (that is they follow the investment philosophy of their fathers and grandfathers).

These are only opinions and opinions not based on facts do not carry any weight in rational economic analysis. The financial analysts seem to convey the idea that riskier investments most definitely give better returns at all times. They hold this opinion as the truth and force it on others by following blatantly wrong analysis, making others feel inferior, etc.; so that their opinion is forced on the unsuspecting layman. Such opinions are not substantiated by any fact or analysis, much less any empirical evidence. But for some reason their opinion has caught the imagination of opinion leaders in public life and in the media and today there is a widespread belief that if you do not invest in the more risky investments you are loosing the guaranteed option to earn more money. This incidentally is the main message of their advertising campaign Mutual Fund Sahi Hai, which even SEBI had objected to (See my article Good News From SEBI – Mutual Fund Sahi Nahi Hai).

One of the ways in which they present biased analysis is for example they project the growth in NAV of mutual funds on a linear growth path, when in fact the market they are dealing with is volatile and returns are never linear over a period of time. For example, they tell us of how even if we have a moderate growth of 12 % p.a. for the next 20 years, Rs. 1000 invested in mutual funds today will give the investor Rs. 9646.30. Read my article And the Tortoise Wins to know how wrong and misleading this analysis is. Mutual funds do not grow in this manner. The NAV goes up and goes down. This is called volatility. Volatility is a risk that the investor bears and it effects the returns on that investment in a significant manner. Some investors gain while others do not. In some years you gain and in others you do not. To make consistent profits, year after year, in a volatile market is impossible. This is in fact the manifestation of risk in the investment.

Keep Opinions Aside and Only Refer to Facts

It is better to look at facts and not opinions. Fact is the data published by RBI. It is not what the media says. The latest available data (September, 2018) is given in the table below (Please click here RBI Data 1997 to 2018 to download a printable version of the Table)

The Table gives facts. And what do the facts show? Facts show that Indians are predominantly low risk investors. Even in the years 2016-17 and 2017-18, when mutual fund investments were supposed to have have risen significantly, the investment in all high risk investments put together did not exceed 10 %. More than 90 % was invested in low risk investments.

The Economic Rationale for low risk preferences

There are strong rational and economic reasons for this attitude to risk taking. An individual has a limited productive life span. For example an individual in service retires at the age of 60. He or she can hope to maximize wealth within this productive life span – before age 60. Post-60, the individual investor can only hope to live off his or her savings. In such a scenario, if the individual is exposed to risk in investments and misfortune wipes out a part or his or her wealth, the individual has no way of creating wealth again. Individuals are rightly risk averse. Just because a few investors made money on the stock markets or through mutual funds, is no reason that all will do so. Individuals deep in their hearts and minds know this. Hence they choose low risk investments.

One cannot and should not insult the investor by branding him or her as financially illiterate. This is simply the arrogance of those who have a privileged (but limited) information (but not knowledge) of financial planning and analysis. They force their opinions on others without the support of facts., The latest information from RBI shows that Indians have not been swayed by the media hype and the publicity that SENSEX and mutual funds get. They continue to have faith in their own understanding of prudent financial management. As Adam Smith (considered as the father of modern economics) famously said every individual makes economic choices that he or she thinks is right in his or her circumstances. This choice is correct for the individual and others have no right to pass judgments. And more importantly they have no right to insult the investor by calling him or her as financially illiterate. Tell your customers this and show them the RBI Table. You can download it by clicking here RBI Data 1997 to 2018.

Implications for life insurance sales persons

A traditional endowment product is low risk. It fits in well with the risk appetite with Indians. ULIP (especially for those ULIP funds that invest in shares or corporate debt) is of a higher risk. ULIPs should be sold to only those investors with a risk appetite for higher risk investments. Sell ethically.