Financial literacy is important for building wealth
Work is a necessity. But work does not automatically lead to wealth. What most people really want is wealth. Capital markets offer an important approach to building long-term wealth. Many, especially people working in basic banking services, don’t see it and only do what they know best. Creating long-term wealth is no longer rocket science. It is necessary to look beyond the havens of history: bank accounts and performance insurance. Awareness is the key and the onus of doing so should fall on those who know best.
The average worker is a small cog in a mind-numbing big wheel called the economy. Year after year, workers earn, spend and save without thinking. For many workers, the data shows that the money saved is sitting idle, many times over, in a bank deposit or an insurance policy that promises a “return.” There is little awareness that money is capital and that it can grow faster. Often times, this increase is several times higher than what the average “hard worker” would have ever imagined. As the great economist and thinker Adam Smith said, “money makes (more) money”. What many savers don’t understand are the ways in which money can make money. massive failures, successes become deeply rooted in social tradition.
Lack of awareness of what works is not confined to the average retail âworkerâ. The institutions and the people who sell their products may be selling what they are selling because they think it is the right thing to do. 50 million policies, in 2013, a large life insurance company withdrew the policy in question because it caused losses to policyholders. The main banking professionals I know have a poor understanding of the products and the overall concepts. Just a month ago, a level- A trader friend from 3 cities wanted to invest through the National Pension System (NPS).
Unless someone is really bad, why would anyone want to be wrong at all? The root cause may be financial illiteracy. The bankers and insurance agents I’ve spoken to are comfortable putting their own hard-earned money into whatever inefficient uses of excess money one can think of, like savings accounts and products. insurance that promise a return.
A lack of understanding of how wealth accumulates creates ever-growing wealth gaps. Savers find comfort in imitating people in their social circles. In this, bankers have an important role to play. At least in cities of level 3 and beyond, the banker is a source of trust. But if members of the banking community aren’t in the loop, much of the ecosystem finds itself locked in the inertia of a savings account.
Over the past two decades, Indian stock indices have risen more than 15 times. Most savers missed India’s strong economic rise. The good news is that India may not even be halfway there. With sustained economic growth, Indian market capitalization is likely to grow much more. If India matches China’s current market cap, the indices will need to rise much more than their current level.
Government-recognized alternatives, such as investing in mutual funds or the national pension system, are now just a few clicks away. The question is, how many infantry in the Indian financial services ecosystem understand this and / or believe in India’s growth trajectory? An institutional push to improve product knowledge is urgently needed.
What Should the Average Saver Do? The most important thing to do is to make investing a priority. Search and chat with investment advisers registered with the Securities and Exchange Board of India. Here’s a handy list of international best practices and questions to ask. Spend time reading. that of John Bogle The Little Book of Common Sense Investing is an easier to read book. Not everyone reads English. However, those who can but haven’t started should get started.
The greatest ally of all investors is time. Between stocks, bonds and gold, stocks are the riskiest. But over 20 years, the risk of financial loss by investing in a broad passive index is almost zero. Index or passive investing gives the investor the average return that the market offers. However, over time, the average yields work wonders. Ironically, getting closer to the average ensures that the “average” investor actually wins with negligible risk of loss. Among other things, the NPS offers this and more.
I have no idea what you do as an investor, but the challenge is to be convinced of the transformative, yet straightforward, long-term investment opportunities that India has.
Shreenivas Kunte is CFA, CIPM, Director, Continuing Education and Advocacy, India at the CFA Institute.
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