The Hindu Business Line : Needed: A savings behaviour model

The branding of investment products is sobaffling that one does not know what one is buying.Investment needs a certain level of professionaladvice, which is not easily available.

THE emergence of an array of savings and investment options and the dramatic increase in the secondary market for financial assets in the recent years in India has opened up an entirely new area of value creation and management, which stands at the confluence, so to speak, of two hitherto alien disciplines. Consumer behaviour from the marketing world and financial economics have together brought to the surface an exciting area for study and research: behavioural finance.

The realisation that this is a serious subject is, however, barely dawning. Analysts and commentators seem to treat financial markets, at least in the aggregate, in much the same way as the early industrial engineers dealt with management itself: a rational subject amenable to statistical observation, measurement and prediction. And yet, in every discussion of the ups and downs of the stocks and bonds markets, the factor called `sentiment' figures prominently. This is a `black box' which is contrasted with the forces of technical analysis, study of the corporate performance fundamentals, an `irrational' irritant, a counter-mechanism preventing markets from operation in their natural, efficient-markets hypothesis mode.

There is nonetheless more to this factor of saver preference than meets the eye. A rich vein of research awaits sophisticated understanding of how investors behave as individuals as well as a congruent collective similar to a consumer sub-segment.

Naturally, interpreting `buyer-behaviour' in the area of say, mutual funds or IPOs, is one field that demands a deep collaboration between the two sets of professions with orientations that till now might have been seen as mutually opposing. Finance experts see themselves almost like `hard scientists' while the brand management and advertising fraternities are seen as `soft, touchy-feely' people. Sometimes, one wonders if the kind of breadth of vision and depth of cross-disciplinary insights that this calls for can actually be found in the same individual.

And yet there is no gainsaying the fact that the `consumer' of such financial instruments, i.e. the retail investor, is in dire need of help. To begin with, she has been spoilt by decades of assured returns as high as 14-15 per cent from PSU debt and other corporate paper. She is a total stranger to the very notion of reward being proportional to risk.

The householder-investor with a few rupees left over after paying for housing and two-wheeler instalments is puzzled as to where he may park funds safely, given the volatility of the market. He is quite scared by all the talk of Black Mondays and bloodbaths, not to mention the arcane language of TV chatterati. (How do you see the mid-cap story going forward? How much upside is left and what downside strategies should be put in place? And so on!) He is very much at sea when faced with the voluminous application forms and the fancy terminology - exactly as he used to be with the `blade companies' offering 20 per cent annual returns some years ago.

For a start, the branding of the products is completely weird and confusing with the result that one does not know what one is buying. `Dynamic, growth & value, half-yearly dividend, dividend reinvest/payout scheme' and such, to quote a hypothetical example, need a glossary before one can decipher what it all means.

There is no standardisation of terminology. Monthly Income Plan does not always mean what you think it does, unless it says `dividend payout.' In some cases of the so called unit-linked plan, you don't even come to know that as much as 30 to 40 per cent of your capital may not be invested at all, but taken away, at the front end as expenses. This is the free market (or free-for-all market?) with a vengeance, and caveat emptor raised to new levels.

In India, the first boom phase came in the primary equity market, when public issue stock prices were laid down by an official. It was the embryonic stage of the equity market, triggered by the dilution of the foreign equity under the FERA regulations; and the new public issues that accompanied the growth phase of the mini-liberalisation that began about 1984. The equity revolution really began to be felt only in the last decade although huge scams and scandals immediately followed it, from 1992 onwards. The retail stock and MF investor population has been growing and inevitably so, for another reason, namely, the falling rates of interest from bank and corporate debt which many a middle-class salaried person and pensioner used to depend on till some five to seven years ago.

Today, thanks to the heightened awareness and public debate in both the press and on TV, the tragic state of the real interest rates (simply put, interest adjusted for expected inflation rate) is beginning to be fully appreciated. In other words, we are facing a certain erosion of the value of one's lifetime savings in short order unless one takes the plunge into the open market and builds up a portfolio of investments.

The truth of the matter is that the average Indian investor is a greenhorn when it comes to financial markets. The causes are many: the lack of opportunity, lack of conceptual understanding and the influence of a fixed-income orientation in the Indian culture, which even applied to the trader category who operate stockistships and showrooms for the big brand name companies. Their minimum expectation is that the family's running expenses ought to be assured by a revenue stream that has little risk attached to it. In this he is no different from the salaried employee.

The effects are that the urban, educated, white-collar employee with a few lakhs worth of savings has been a sitting duck for a succession of adventurers to take pot shots at. In other words, the same family or person who is at the core of the informed buyer segment for household products and appliances, cars, two-wheelers and so on is hopelessly lost when it comes to choosing amongst, say, mutual fund types and options.

Elsewhere in the world, the salaried person's savings are most often deposited in mutual funds, either directly or via pension funds. The theory behind this is that by pooling together a huge aggregation of individual savings and investing them, using the professional judgement of the fund manager, one spreads risk, takes advantage of volume buying and scientific data analysis, expertise and so on. Therefore it is seen as the ideal option for the individual who does not have the time, knowledge or experience to make a succession of judgements involving his hard-earned savings.

In India, one is at best at the mercy of the broker-friend-advisor network. Not that it is always unhelpful, but the individual investor's own situation and risk preference are matters that he should be able to articulate and then apply to an investment strategy that combines the usual four: cash and equivalents, Government-backed bonds, debt, and equity. The catch is that as few have the capability to do the dynamic juggling amongst the four on their own, they need the help of a relatively low-cost, low-risk selection of mutual funds. This requires a level of professional advisory which is not readily available today. Largely it is a case of the blind being led by those with partial sight, at best.

The young men and women who handle vast sums of money might as well be moving Monopoly money across the game board. The individual buyer's decision-making process is left far behind. It is time this is remedied.

(The author has been a student and observer of markets, people and organisations for over 35 years.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
C2C is happening!

`India among top 5 growth markets'

Adding to it

Needed: A savings behaviour model

Chairman Mike

Not quite in tune

Cave & save vs Rave & wave

A story of strength in images

Not just brands

Hardsell