Empower yourself by transitioning...

Some days back I was privileged to attend a session on Mastering Asset Classes in investments which was presented to us by a very senior and highly knowledgeable trainer (Madam) Ms Uma Shashikant. Madam is a PhD in Finance(Goa University) and has been a trainer, researcher and consultant in the capital markets area since 1988. She is currently the Managing Director for Centre for Investment Education in India(which she was instrumental in setting up).

Madam is a noted and well respected personality(throughout India and also) in the Financial Advisor fraternity in Goa, not just because of her current post or position but more importantly because in the late 90's, when the regulator (SEBI) came up with a mandatory exam(AMFI) to qualify for the distribution of  Mutual fund products, madam travelled down from mumbai and trained most of the mutual financial advisors(including both my parents) in Goa for this exam which helped them in continuing/setting up their profession. We will be eternally grateful to her for this effort.

In this post I would like to share her views on Transitioning from Saving to Investing.

First, savers are hoarders. Storing money in some visible retrievable form appeals to them. They accumulate assets that make them feel they have something of lasting value. They fail to see that assets will need to have an economic value today or in the future.The transition to becoming investors requires the mindset to view assets for their economic value, and plan who will realise that value, how and when. Mere accumulation of something of value is not good enough.

Second, savers are focused on outcomes, not processes. They are keen to know what they will receive if they gave their money to someone. They are thus gullible to fraudulent packaging of financial products. Several gave their money to dubious schemes, plantation projects and unknown deposits. The motivation is the promise about what they would get. Their focus is on the return. Therefore, safety for them lies in the return of principal invested.

To transition from saving to investing, is to come to terms with risk and get armed to deal with it, rather than hope for risk to go away.

Third, savers fail to work out the math in finance. Since their focus is on preservation than growth, they are not sensitive to the fact that every rupee can earn interest every day. They do not seek the efficiency of putting their money to work, and abet lazy money lying unused. Allowing money to lie in bank accounts is quite common among savers. As long as they know the money is safe, not putting it to use does not bother them. To transition from saving to investing is to see the merits of asset allocation and diversification. To invest is to understand that it makes perfect sense to earn an average return at lower risk, by investing in a range of assets, rather than try and figure out the next best thing.

Fourth, savers are lured by bargains. They like the idea that a rupee saved is a rupee earned. They also feel a sense of importance and accomplishment when they have made financial decisions that result in immediate, visible savings. Buyers of insurance products do not see it as a decision that involves regular outgo of premium over years for risk protection and a poor rate of return. They only see the immediate tax saving that is possible. They also like the benevolent seller who compels them to save some money regularly. Young earners buying large homes so they compulsorily save and build an asset, which will grow in value, fall in the same category. They fail to see that they may need liquid assets in early stages of their lives. To transition from saving to investing, they need to see that assets come with varying combinations of return, risk, liquidity and desired holding period. There is no right combination that works for everyone. While choosing a product you need to consider immediate as well as future needs. After saving tax for three to five years, several default on insurance policies, unable to set aside the huge premium. Tax was saved, but an investment opportunity was lost.

Fifth, savers like icons and have a righteous view of things. They think there should be a prim and proper way of doing things and if they have to become investors: someone should lead them to making the right decisions so that they are protected and guided correctly. As it is in life, so it is in investing. There are no ideal marriages or ideal jobs. The shades of grey in investing are something they should learn to deal with. Savers 'kick and scream' about being led astray and their expectations from service providers tend to be unrealistic. Investors see that they have to make informed choices, and be responsible for their actions. They are prepared to do the hard work, when they make their investment choices.

It is important to save. This is what we were told when we began to earn money. We repeat the same lesson to our children. We then retire with the same attitude of wealth as a saved pile. We seek protection, assurance, promise, safety and all those comforting outcomes from the money we have saved, but we still fail to see ourselves as investors. 

So, what will it take for you to transit from being savers to becoming investors?

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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