No risk please, we’re Indians

Conducted by AC Nielsen ORG MARG, the survey questioned 40,040 households in 29 states questions about their money. The survey asked 40,040 households how they would invest Rs 1,000 and gave them three choices:

• Choice 1: money could grow to Rs 2,000 or fall to Rs 500

• Choice 2: money could grow to Rs 1,200 or fall to Rs 800

• Choice 3: money will grow to Rs 1,050—no loss

The findings: three out of four households chose the third option. This option implies that the investor will get a return of 5 per cent with no downside risk.

About 14 per cent chose option two, under which the return could be as high as 20 per cent with the possibility of losing the same amount. Only one in 10 households opted for the first option, where the money could either double or halve.

This financial behaviour is common across rural or urban India, women and men:

• It is literacy-neutral: be it an illiterate, a primary school or high school pass-out, or a graduate and more, the response isn’t too different.

• It is age-neutral: people below 30, above 50 and those in between, all have similar responses.

• It is income-neutral: the choices of households with annual incomes of less than Rs 24,000, more than Rs 2.5 lakh and everyone in between, were the same. All fit between 70 and 80 per cent.

The risk-averseness of Indians reflects in their actions—partly. Less than 2 per cent of the respondents had invested in bonds, mutual funds or shares. These are instruments that carry a risk of capital loss. But almost half the people had put their money in a savings bank account, 8.6 per cent in a recurring deposit and 4.7 per cent in a fixed deposit—instruments where the risk of losing money is practically nil.

But, on the other hand, almost one in 10 had invested in the extremely risky chit funds—more than those investing in ‘‘safe’’ recurring or fixed deposits or even National Savings Certificates or the formidable Public Provident Fund (PPF). What’s puzzling is that the number of people investing in the zero-risk PPF is less than those buying riskier instruments like mutual funds, bonds, shares and chit funds.

What does this mean? Three things:

• Our perception of risk is only to the extent of volatility—we are not comfortable with the value of our investments fluctuating, more importantly, losing value. Capital preservation seems to be the key driver of investments; the risk of our investments losing value to inflation, is not being considered.

• We seem to be uncomfortable with securities—be they shares, bonds or funds. We feel more at home with saving bank accounts, recurring deposits, fixed deposits—instruments that cannot be traded on a market.

• Often our perception of how we think about risk does not match the actions we take while investing. Could it be a case of inadequate information and knowledge about modern financial products? If so, there is a strong case for a financial literacy drive.

(Tomorrow: When it comes to trust, Govt still the mai baap)

PART II

PART III