You want to do the right thing when it comes to money. Your hard-earned income deserves better direction and management to generate the wealth effect needed to meet your lifestyle goals. However, your financial well-being has a lot to do with your behaviour.
This column has touched upon it regularly. A study published earlier this year in Malaysia suggests that individuals with a firm grasp of personal finance and money management are more inclined to make prudent financial choices, exercise self-control, and avoid excessive spending.
The operating words are ‘prudence’, ‘self-control’ and ‘avoiding excessive spending’. New data from the Reserve Bank of India shows that credit card defaults are rising in India. The ease you can spend can have a ripple effect on your wealth outcome.
Financial technology or Fintech companies play a role in causing that ripple effect. They simplify spending money you do not have or spend tomorrow’s money today. A study of the lower income households in Malaysia last year found that due to the ease of buying digitally, the desire to have a stylish lifestyle and display an image of wealth was a driving factor for them to buy luxury cars, stylish homes or high-end electronic devices. In many instances, people used debt.
Indians are no different. The surge in personal loans and credit card spending indicates people want to spend tomorrow’s money today. Personal finance is not just about investing it right. It is also about controlling your senses and holding back on big spending based on impulse.
You must have a financial plan for every significant ticket expenditure. Managing finances does not mean sacrificing your aspirations or desires for a better lifestyle. It means making a plan so that you can convert every such dream into a financial goal and achieve it without disrupting your finances.
As you exercise self-control in spending, you need to push yourself a bit more while saving and investing. The latest bulletin published by the National Stock Exchange cites a study that provides evidence about individual investors anchoring their subsequent stock market purchases around the value of their initial purchase.
When you start investing through systematic investment plans of mutual funds, you cannot just continue with the same quantity of money each month. Your income increases with age, and you must increase your investments. It is a good idea to keep adding to your existing portfolio of mutual funds. In the long run, your investments need to take care of financial needs, considering the impact of inflation.
The issue of ‘self-control’ matters while investing, too. Your emotions can push you to make wrong investment decisions. The temptation to ‘get rich quick’ drives many towards high-risk securities. The current euphoria in the Indian equities shows that more money flows into small and mid-cap companies than large-cap companies.
That is a risky strategy for someone entering the market today at the rally’s peak. At the same time, the dramatic surge in the number of traders in the futures and options category is an eye-opener. An updated study by the Securities and Exchange Board of India recently highlighted that barely one out of ten traders are making money.
The government intervention is a reaction to most of these behavioural patterns. There are several studies world over that show that financial behaviour is a result of your ability to learn. Financial literacy programmes barely make people aware of products and theoretically talk about pitfalls.
Despite the high voltage campaigns, the average holding period of mutual fund systematic investment plans is less than five years. The government needs to think through a structural change to bring about a behavioural change. Equities, as an asset class, need your money to stay invested for long enough to give you the benefit of compounding returns.
The government should make investing in index funds free of capital gains tax after ten years. If you hold on your index funds long enough, you can take all that money home. That would encourage financial services companies to create products that encourage individuals to invest for the long term. It would also change the way you think about investments.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)