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Savings and Investments, Perceptions and Reality

A survey of investment beliefs in smaller cities paints an alarming picture, specially for mutual funds

Apparently, there are savers and investors in this country--a large number, actually--who think mutual funds are a highly risky investment avenue. By itself that's fine, because riskiness is a relative concept. But a survey that found this also found that a substantial proportion of people thought that mutual funds were by far the highest risk investment avenue. Much higher than even equity. In this survey of investors in smaller cities--the fifteen cities outside the ten largest ones--as many as 83 per cent of respondents said that said that mutual funds were 'high risk', as opposed to 41 per cent for equity. And for that matter, 4 per cent for insurance, 24 for company FDs, 26 for bonds, 13 for gold and 30 for chit funds, among others. Thus the mutual fund number was more than twice that of the next highest, which happens to be equity.

Even if one assumes that 'mutual fund' always means equity mutual fund to all the respondents, it's alarming for their high risk perception to be twice that of equity itself. Of course, by any rational measure at all, this belief does not reflect the real risk level of funds. Thus, the finding is entirely about what people know, or think they know about funds, rather than about the actual characteristics of different investments. This is not the only finding in this survey which should be alarming to those selling mutual funds, which was conducted recently by the mutual fund advisors' website cafemutual.

Among people who do not invest in mutual funds, 29 per cent didn't have much idea of what they do, which I guess is a benign reason for not investing. However, the remaining had either heard that they were risky or had other bad things about them, which are actively hostile reasons.

The survey also had a set of questions that tried to map different financial goals to what people thought were the best way of saving for them. The goals were the common ones like children's education, marriage, emergencies, retirement, home, car or vacation as well as the more overarching 'need to beat inflation' and to 'protect and preserve wealth'. The results were not pretty, neither for mutual funds specifically nor generally. While the sub-1% score for funds was obvious since these were people who hadn't invested in funds, the focus on gold and bank FDs is remarkable.

In every one of the financial goals, gold was the preferred asset class for at least 20 per cent and sometimes as high as 30 per cent of people. Bank fixed deposits were not far behind with a percentage that was generally around the same as gold for most goals. The third popular asset class were insurance policies. Between the three, there was no financial goal where these three did not add up to 70 per cent or even more.

For the mutual fund industry and for financial advisors who promote mutual funds, these numbers show that they have a long way to go in smaller cities. A lot of people have heard of funds, and somehow, a lot of them have decided that this is some risky form of punting that is best avoided. One can speculate what the source of these perceptions are but speculation is risky! The bottomline is that for mutual funds there's a huge communications job outside the big cities that hasn't even begun. The dominance of gold and bank FDs in the Indian personal finance framework is not surprising. However, the two are very different. The The high use of gold as a savings instrument is a problem for a variety of reasons, not the least because it is utterly unproductive as well as is far more volatile than people perceive it to be. And while bank FDs are better than gold in this sense, it's sad to see that people think they are a good hedge against inflation.

That India needs financial literacy has almost become a cliche, but like many cliches, it's absolutely true.