Change mindset to pocket better long-term returns

Vikaas M Sachdeva

To travel a short distance, we choose to take a flight, while we choose to travel by bicycle for longer distances! This analogy may not seem logical but it sums up the behaviour and mindset of a large portion of Indian retail investors towards mutual fund investments. India is primarily a savings-dominated market with people preferring to invest largely in guaranteed-return products such as bank fixed deposits or gold for the long term.

The recent issue of some tax-free bonds received a significantly higher subscription, even though there was a coupon rate of 7.5-8 per cent, and a 15-year lock-in period. But, the same investors are hesitant to commit funds to equities with a 15-year perspective. While the tax-free bonds will give a mere 7.5 per cent return and take away liquidity, investment in equity can give much higher returns without sacrificing liquidity. So what is there to change? A preference to assured returns, a risk-averse tendency and lack of a well-researched approach have been limiting factors that need persistent, planned efforts to bring about awareness and transformation. Despite efforts by the industry, an Indian retail investor still does not understand the benefits of equity investing.

For instance, the Nifty50 with a CAGR of 14 per cent, returning twice the value of tax-free bonds, would usually top the list of investing options globally. However, Indian investors would continue to be conservative about their investment strategies and would choose risk-free debt instruments over equity any day. 

Wealth creation

Mutual fund investments are close to just a mere 3 or 4 per cent of the total investment by individual investors in financial assets. With proper planning and advice based on risk appetite, investors across gender, age and risk appetite can meet any of their lifetime goals.

But to unearth the potential of wealth creation through the right choice of mutual funds, a change in prevalent investor mindset is the need of the hour.  The Indian financial markets have been very profitable for investors, with equities generating nearly 14% in the past 10 years, compared to 9.1% by gold and 8.2% by real estate. For those lacking time and expertise to track financial markets, mutual funds are undoubtedly a prudent route to wealth creation in a relatively safe and systematic manner. A healthy discussion with an accredited financial adviser must be encouraged to allay concerns on transparency, liquidity, disclosures, professional management and guide investors to benefit from a greater potential for higher returns. 

Even if we consider investments in provident funds and other retirement options, which are structured to invest 80% in debt and 20% in equities, the total allocation to equities is still not up to the desired level. Ideally, to be able to beat inflation, the allocation to equities should be higher compared to debt. However, once again the Indian psyche has been dominated by the urge to "seemingly" protect capital and the illusion of assured and "safer" returns -which have tended to limit the potential to generate wealth in the long term.  

Equity funds provide an ideal investment option to place the investor's savings for a long-term inflation-adjusted growth, so that the purchasing power of his hard-earned money does not plummet over the years.

Changing scenario

The world is not the same any more. Technology wears a new look every day, e-commerce is speeding and disruption is the new norm.  We've been quick to change our consumption behaviour and mindset. But an average investor has been unable to harness this momentum. A closed mindset will not help investors move towards greater financial security.

We also find 'free' services very alluring! We'd 'rather get it free than pay'. Investors who have been dabbling in the stock market are tempted to invest without the help of financial advisers.

Can we change the psyche of the Indian investor? A two-pronged approach of awareness and education can help here.

While industry players have been trying to usher in an era of growth and value creation, individual investors too must take steps forward. An alteration in prevalent investor mindset to one of openness, vigilance, and awareness of one's financial goals must lead the way.

The challenge is not a mere one that can be tackled alone through industry efforts. S&P's Global Literacy Survey revealed that, in India, 73 per cent men and 80 per cent women are not financially literate. Investors must start now by understanding their financial goals, acquainting themselves with the best-suited products and having a plan in place to preserve their capital against inflation.

As the mutual fund industry changes, investors operating with a "yesterday" mindset are likely to be left behind, while exciting opportunities will arise for those who are willing to learn, have the appetite for wealth creation, investment discipline and an open mindset towards change.

The author is CEO, Edelweiss Mutual Fund. Apart from being a director on the board of AMFI, he is involved as a committee member in two AMFI initiatives (MF Utility initiative and Customer Engagement initiative). He is also on the board of the Mutual Fund Advisory Committee appointed by SEBI.  The views expressed in this article are his own.