There are laws of attraction. Then, there are reasons why you like something and why you do not. Similarly, in the wonderland of investment, there are reasons for you to get attracted to an investment.
Multiple factors affect your ability to arrive at an investment decision.
Take gold, for instance. Indian households have over 25,000 tonnes of gold, according to the estimates of the World Gold Council, a global industry body. That is more than three times the quantity held by the US Federal Reserve, the most influential central bank in the world. It is considerably more than about 600 tonnes held by the RBI. The value of the gold is close to 40 per cent of India’s current gross development product or GDP of $2.8 trillion. No other nation in the world has households hoarding so much gold.
Your attraction to gold is not just because of the ‘pull’ created due to traditional reasons. There is also a ‘push’ away from other asset classes. That makes you buy more gold, according to the household finance survey conducted by a committee set up by the RBI.
The pull aspect
The investor behaviour of ‘pull’ is primarily driven by the tangibility, stable pricing offered by an investment avenue. Most Indian households (nearly 88 per cent) keep their assets in real estate and gold.
There is a lot of attraction to government schemes. So, those managed by the post office like the public provident fund or Sukanya Samruddhi Yojana attract household savings. You feel that the government guarantee schemes make more sense to you. A key factor to you when you pick these is the simplicity of these products. You invest, and you get a guaranteed return. In the case of gold and property, you are happy you can feel your assets. They are tangible.
There are a few who own financial assets. They are aware of the benefits that accrue by investing in them. The percentage of households owning financial assets is small in comparison to the developed nations.
People in those countries have invested their retirement money in the stock market since the 1970s. It is a habit to allocate a portion of retirement savings to financial assets. That perhaps explains the higher average household wealth in America than anywhere else in the world.
The ‘push’ factor
You end up buying gold or real estate or guaranteed government schemes because you view other asset classes as risky. You get pushed away from other asset classes. Companies that sell financial products do not explain the product to you in your language. Typically, a lot of the literature has jargons that are beyond your comprehension.
“The degree to which households can relate to the terms and conditions of financial products do seem to have an important impact on their decision to hold gold,” the RBI survey reveals. That is a significant finding. The study highlighted that for many of you, the understanding of the risk versus return is unclear. Most people fear losing money. Ever since the survey was published in August 2016, a lot has been done to create awareness for financial products like mutual funds, insurance and fixed deposit products.
There is a significant increase in the number of people buying financial services products. However, financial awareness was not the only reason. A part of the surge in sale of financial products was triggered due to demonetisation. Many people found informal channels of investing difficult and began investing in mutual funds, according to an industry source. As a result, new people who bought mutual funds were those who used non-institutional channels of investing like chit funds.
What it means to you
The ‘push and pull’ phenomena are a state of mind. For example, the share price of Maruti Suzuki tripled in the past five years. If you knew that, you would not have spent `6 lakh on that second car. Financial markets have a pattern of value creation that is different from guaranteed returns or tangible assets.
World over, people allocate only about 5-10 per cent of their assets to gold. Real estate remains a vital part of wealth around the world. However, in rich countries, that number is less than 50 per cent of the total household wealth. It is because households have enjoyed the benefit of financial market wealth creation. There is no reason why you should not benefit too.