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Getting the Basics Right

Sadly, most investors don't have a clear-cut idea about what makes them a speculator and what an investor

There's a lot of smoke and noise about investor education in India. The regulator forces mutual fund companies to spend a certain sum to educate investors. After a certain time, it even permits them to confiscate the gains on unclaimed money and spend it on educating investors. No doubt, it is very enjoyable to spend other people's money, as reading a political party's manifesto made me realise today. However, I often feel that investor education efforts are aiming too high.

They are generally based on the idea that the subjects know very little or nothing about investments and therefore need to be taught up from the basics. The reality could be different, in a way that completely disrupts the approach that investor education takes. There are so many misconceptions that most people have about savings and investments that a real education would have to be planned around helping people unlearn what they know.

For example, only a tiny fraction of savers seem to appreciate the difference between investing and speculating when it comes to investing in equity or equity-based mutual funds. On the one hand, there are those who consider the most stable and risk-free kind of long-term investing to be speculation merely because it's in equity. On the other hand, we have people trading in derivatives with time-frames of a few days or even hours and they consider themselves to be investors.

Of course, these two cases are at two extremes, so the difference is clear-cut. Most investing falls somewhere in between, with the same actions becoming one or the other depending on one's frame of mind. You could be steadily doing an SIP in an index fund with the time-frame of a decade. Then, there's a big crash and you suddenly decide to time the market by pulling out your investments and wait for the bottom of the market. You are now a speculator. It's a state of mind, and rather hard to teach in formulaic investor education courses.