Equity investing is risky, but so is everything 

Here is why people stay away from the stock market and mutual funds as they consider them a risky affair.

Published: 25th November 2019 11:11 AM  |   Last Updated: 25th November 2019 11:11 AM   |  A+A-

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Bombay Stock Exchange (File Photo | Reuters)

Just when you think you can make an entry in the wonderland of investment, you get hit by a disclaimer. ‘Mutual Funds are subject to market risk. Read all scheme documents carefully before investing.’

We know there is a risk of investing in the stock market. However, an even more significant risk exists in crossing the road, navigating your two-wheeler through potholes or commuting to work in a crowded suburban train. Intense vigilance is needed for the safety of life more than that of investment. The attitude of authorities in every city or town in India towards road safety speaks for itself.

Recent data from the World Health Organisation suggested that in 2018, India witnessed 4,67,044 road accidents. India accounts for merely one per cent of the world’s vehicles but six per cent of the world’s road accidents.

Cut to financial markets

Barely two per cent of people invest in the stock market. The number of demat account holders has barely increased from two crore, and despite all the noise around ‘Mutual Fund Sahi Hai’, the number of unique mutual fund (MF) investor is not even two crore. In a country of 130 crore people, that is terrible statistics. In the US, every second individual is a MF unitholder, and every third one is a stock owner.  

In India, most people stay away from the stock market and even MFs. A lot of people associate risk with MF investing. Constantly bombarding people with ‘mutual funds are subject to market risk’ statement creates a negative impression. In the past, we have had funds from the erstwhile Unit Trust of India guaranteeing returns in US 64 and other monthly income schemes. That was sheer falsehood sold to people. Regulators have already come down hard on any such practices. There is a code of conduct for MFs, and the Association of Mutual Funds in India has done a commendable job to enhance regulatory compliance of MFs. There are no guaranteed return schemes anymore.

Similarly, it is a well-known fact that over the past 30 years, equity markets have outperformed all other asset classes. You can pick any benchmark index and compare returns. Over 15-20 years, equity assets outperform other asset classes. People have created wealth world over by keeping it simple. MFs have to offer market-linked returns on underlying assets. Investors have to be aware of these risks. However, awareness cannot induce fear of investing. Regulators primary priority has to be to discipline market participants that deal you’re your finances. 

In your life, you would need your bank account, insurance and investment. At some stage, these three pillars of personal finance would touch you. Governments and regulators in financial markets like the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (IRDAI) would be responsible for overall market regulation of the three. The messaging from regulators has to scare potential offenders and not investors. The current thrust on highlighting market risk up front seems to be scaring away a lot of new investors.

Over 80 per cent of demat accounts held by depositories are dormant. MFs are considered a risky investment when they are not even an asset. They are a vehicle to own multiple asset classes. Equity and debt markets have different cycles and the rate of growth. Knowledge matters to you more than the idea that someone up there is protecting your investment.

The truth is that you have no protection against poor investment decisions. If you rely too much on others, you will end up making the wrong choices.

The best investment is in the effort that you will put in gathering knowledge. Your investment has to be backed by your homework.You can always hire a professional financial advisor. However, you need to be leading the conversation with your financial advisor. Knowledge is the best form of protection in personal finance.  


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