Take money matters to school

A business channel recently aired the proceedings at one of the many investor education camps held across the country. On stage was a panel of well-heeled experts from the usual places — insurance, wealth management and mutual fund firms.

The question and answer session went something like this. A 35-year old man asked: “I am a working professional and want to buy a home in the outskirts of Bangalore. Is this a good time?” An expert from the panel sagely told him: “Well, it depends on your asset allocation pattern and risk appetite. If you are in your thirties, you must already have a 60 per cent allocation to equities, a term insurance plan and an emergency fund. Do you? Most Indians are overweight on real estate.”

The man, clearly looking for an answer to his question and finding none in this statement, subsided into his seat.

A young girl in her twenties asks: “What are some of the portals to understand the basics of finance?” The expert pipes up to say: “Well, all you need to know is that financial planning has four stages — goal-setting, risk profiling, asset allocation and monitoring…”.

She sits down, puzzlement writ large on her face.

‘Camp’ approach

This episode tells us exactly what is wrong with the ‘camp’-based approach to financial literacy.

Can you teach an uneducated adult all he needs to know about the human body, health and wellness in a single Health Camp? And if you did, do you expect him to stay superbly fit for the rest of his life? Hardly.

Yet, we are hoping to teach laymen all they need to know about fiscal fitness through half-a-day seminars and media campaigns. To evaluate the risks and rewards of investing, one needs to understand the basic concepts of finance first — the time value of money, where returns come from, what is risk and the effect of leverage and taxes on returns.

Without knowledge of these basics, how can any lay person process all that gobbledygook about asset allocation, financial planning and risk appetite?

The problem with attempts to impart financial literacy through one-off seminars is that the time available is simply too short. Investors who attend them don’t want lengthy lectures on the virtues of planning. They want specific advice on where to invest. The speakers want to stick to generalities. The result, usually, is that no one’s objectives are met.

Plug or advice?

The problem with some of these initiatives is also that the line between genuine financial advice and product recommendations often gets blurred.

When Unit Linked Insurance Plans (ULIPs) were all the rage, newspaper advertisements to highlight the merits of these plans were branded as an ‘investor education’ initiative. In reality, the best investor ‘education’ then would have been to tell people about the prohibitive cost structure of ULIPs.

Most investor education initiatives also take the help of sponsors from the financial industry. Experts on the panel too are often from the firms’ vending products. Therefore, an expert from an insurance firm can seldom resist the temptation to talk about how most Indians have inadequate insurance cover. A mutual fund representative will not let his session pass without a mention of systematic investment plans. Financial planners often ask querists to ‘consult their financial advisor’ before taking any step.

Horse before cart?

With many institutions sitting on a sizeable kitty that is statutorily earmarked for investor education, there are now dozens of ad campaigns on air too.

With the Securities and Exchange Board of India mandating that all fund houses must spend 0.02 per cent of their assets on investor education, mutual funds have been carpet-bombing the public with ‘awareness’ hoardings and ads. Some talk of SIPs, others talk of using mutual funds to plan your child’s education.

The BSE’s investor protection fund has been sponsoring a reality show on television called Sensex Ka Sultan, which pits investors against each other based on their derivative trading skills. Birla Sun Life Mutual Fund has an interesting new website that educates investors about why mutual funds take time to deliver returns.

While some of these initiatives are no doubt innovative and may help savvy investors get better at investing, they certainly won’t help people who don’t know the ABCs of finance.

One of the initiatives worth mentioning in this context is the National Stock Exchange’s ongoing programme to teach students from class 8 to 12 from 2,000 schools in Tamil Nadu, the basics of money management and finance. But such efforts cannot succeed without teaching staff who are well-acquainted with finance.

Back to the school

The truth is that learning the basics of money management, much like learning biology or arithmetic, cannot wait until one has joined the workforce. Financial literacy has to be imbibed at a young age and this is best done by integrating it into the school curriculum.

If a student from class 6 is taught about how a frog’s digestive system works and why metals expand when they are heated, it is equally important to acquaint her with how a bank account works and how prices respond to demand and supply.

Yet, the problem with the Indian education system is that a student gets his first nodding acquaintance with finance or economics only in Class 11; and that too, only if he opts for the commerce stream.

If he chooses science, he can actually sail through his entire school (and college) life without learning anything about the time value of money, the effects of credit, inflation or the working of markets. All he has learnt about finance are a few math problems on percentages and profits or losses on transactions between Ram and Shyam.

The neglect of economics and finance in schools seems to stem from the received wisdom that young minds should be focussed on higher learning and not be polluted by such mundane subjects as trade, commerce or money.

Yet, think of how basic knowledge of accounting can help you manage your household finances well; or how understanding inflation can help you make good spending and saving decisions.

Financial literacy could promote greater good too. Indeed, if Indian households had a good understanding of finance, unscrupulous promoters could scarcely perpetrate rudimentary financial scams such as on such a mass scale. Nor would the RBI officials have to periodically urge Indian housewives to buy less gold.

Therefore, why not make a beginning right now and introduce finance, business and economics into the school curriculum?

It will make all the difference to India’s household savings, exchange rate, fiscal situation and prosperity, in just a dozen years from now.

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