Good question. It is like asking why do people drive fast on the roads. All people do not drive fast or rash. Some people enjoy driving fast because it gives them a thrill. They feel very elated when they drive fast and see that they are overtaking every body else on the road. There is a surge of excitement that gives them a sense of adventure.

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Investors have a strong desire to earn money fast

Similarly, all persons do not invest in high risk investments. In fact most do not. Some people invest in high risk investments because they get a sense of adventure. They cannot think of not taking risks in investments. They feel that by taking risks in investments they will earn a lot of money much faster, than by not taking investment risks.

Investors who take risks can be of any backgound

Investors who want to take risks can be young, old, rich, poor, of any gender, of any educational or social background, etc. The willingness to take risks in investments is not in any way related to a particular social or economic or demographic background. In fact even businessmen who take risks in business investments, avoid risks in their personal investments.

Taking risks or not taking risks is not a moral question

There is nothing right or wrong in the decision to take risks or in the decision to not take risks. This is purely a personal choice, based on a personal attitude. Just as some people like to walk to work, while some others prefer to use public transport and yet some others prefer to use their own vehicle. Morals and ethics do not come into the picture in the choice of the mode of travel. Similarly choosing the degree of risk to carry in investments is also a personal choice and there are no moral or ethical angles to the decision.

However financial prudence is important

At best, there may be an angle of financial prudence. That is, the wisdom to not risk your money when there are so many pressing needs to be fulfilled. Money lost in a risky investment is lost forever. The same argument can be given for driving prudence. A wise advice to every driver is to not drive fast and to not take risks on the road. It may lead to permanent disability or even death. But a driver who gets a rush of blood to drive fast will not listen to sensible advice. Similarly financial prudence or wisdom, will not be accepted by an investor who wants to take investment risks. He or she is simply driven by the urge to take risks in investments.

The risk take believes that he or she knows how to make money by taking risks in investments

Drivers do not fear disability or death while driving fast. Similarly risk takers in investments do not fear loss of money. Just as the rash driver feels that he or she is one of the best drivers in the world, so too the risk taker in investment feels that he or she know exactly how to make money by taking investment risks. It is therefore not worth wasting one’s time telling a risk taker in investments to not take risks. It is in the way they think.

The concept of risk appetite

If investors know that they have an equal chance to lose money as they have to gain money, then why do they take risks in investments? Financial theory call this the risk appetite of the investor. Some investors have a risk appetite while others do not have a risk appetite. Further, from the group of investors who have a risk appetite, there are some who have a bigger risk appetite while others have a smaller risk appetite.

Risk appetite has a scale – a range

There is a scale of very high risk appetite to very low risk appetite. Therefore the world is not made up of 2 categories: persons who want to take risks and persons who do not want to take risks. There are many categories of risk takers. Investors who want to take investment risks may fall anywhere on that scale. Hence there may be investors who only want to invest in high risk investments, while some investors only want to take minimal risks, and may be willing to invest only 5 or 10 % in high risk investments.

Risk appetite of Indian Households

From data published by RBI for the Indian households, (available since 1970) only in one year (2008) the percentage of savings in high risk investments (such as shares, mutual funds, chits, NBFCs, etc.) was more than 10 %. That is to say for the remaining 50 years (Yes, 50 years), Indians have saved 90 % or more of their total savings in low risk investments such as banks, post office, life insurance, provident fund, pension fund, etc. In 2008 it was 88 %.

A very strong bias of not wanting to take investment risks

The risk appetite of Indians therefore is low. When data shows such a strong tendency for low risk savings, for 50 years, year after year, with many sock market booms during those 50 years, the chances of your meeting a customer who has a very high risk appetite is negligible. In fact the chances are you will not meet such customers. Remember this is despite the fact that the mutual fund sector has run a huge campaign to get investors to invest in mutual funds.

Your Market is intact

The market for life insurance, both traditional and ULIP is intact. In subsequent articles I will show you the market for ULIPs and the market for traditional. But first we must understand the position of life insurance products as a part of all other financial products. Stay tuned, we will

Sell Risks Not Returns

Look out for more articles in the immediate future on ULIPs and how to sell them. Follow ethically correct practices to earn your customer’s trust and confidence and to establish yourself as a successful agent. For a life insurance agent to be successful he or she should …

Sell Risks Not Returns
Because Returns Are Uncertain, While Risks are Certain

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