There is an adage that human beings have evolved from animal kingdom and embody the psychology of an ant. Animals derive satisfaction upon eating stomach full and never bother for tomorrow, whereas ants work hard during summer and saves for rainy season.
Humans learnt basic culture of savings and satisfaction from ants and animal kingdom. In fact, ants are guide and guru to human beings as they demonstrate togetherness, communication, savings and building of wealth.
In the four phases of our lives, the first two are important i.e., zero to twenty during which he/she assimilates and understand life and life style through knowledge and wisdom, 21 to 50 wherein he/she works hard for himself/herself, their family and accumulate for future generations. They replicate new generation with similar qualities called Second Generation.
Savings converted into income generating assets shall give regular income and appreciation in value of asset. During the last leg of life, these assets provide self-esteem, security and aid in the hours of need.
In good olden days, surplus income was saved in form of land, building, gold and animals. But there was a threat of losing wealth in dacoity, theft or natural calamities. Over the past 20 years or so, psychology, lifestyle and outlook in life has permeated our financial culture in many ways.
There was no or low RoI (Return on Investment), focus was more on “Security” of Investment or wealth. The major challenges were how to protect their movable wealth like gold, diamonds and jewellery.
Wealth was converted into unproductive assets such as gold bars, diamonds and were protected in potholes within the earth or in the middle of a thick wall within their premises. These were best known lockers.
Investing in animals like horses, cows and bulls were having short shelf life of less than 15 years with zero residual life. Invention of “Showkar” system in a way paved way to modern banking of accepting surplus of one person and lending to needy or business man against interest to cover inflation, risk of investor and margin for handling such deposits and advances.
Person who invested with such Showkar was getting better return on investment with security for his investment. Borrower was getting required capital for his business/venture/adventure.
Private banking took 200 years to evolve to present days “Industry status”. They offer variety of avenues for depositors. The depositor should strike a balance considering following criteria:
To Counter Inflation
Increase in wealth
Return on Investment
The depositor who has time to spare and investment skills can invest in different products at his own risk, such percentage of population is less than 0.01 per cent.
Majority of individuals with limited means want saving avenue to meet the criteria of family obligations and to encounter medical needs. French revolution and corporate investment created a new market for small investors to be owner of a major venture restricting his risk limited to his part investment (Limited Liability) and easy liquidity of converting into cash through stock exchanges.
Listed companies attracted small investors and developed banking offered risk free rate of return with liquidity assurance. Individual investors now has wonderful options of investment either in lump sum or in small savings in bank, corporate, post office, NBFC, insurance, chit funds and mutual funds. Stock Exchanges were groomed and graduated with 100 per cent transparency using technology and internet with a committed T+2 Settlement into bank account.
Listed Corporates attract individuals with high quality of investment characters such as liquidity, multiplication of wealth within short time, tax benefits of capital gains and exemption of dividend from taxation. Mutual funds are playing a great role in protecting ordinary investor who has less or no knowledge of stock exchange with limited resources.
New Invention of SIP (Systematic Investment Plan) in the hands of individuals with small pool of surplus allows to tap through mutual funds invest into NIFTY FIFTY, BSE 100, IPO, Portfolio managers facilitate high net worth individuals to maximise their wealth through listed shares, commodity exchange and international stock exchanges.
Post offices played a major role in attracting rural Bharath providing service at doorstep of investor through Kisan Vikas Patra, national saving certificates, monthly income plan, senior citizen savings and public provident fund, life insurance, presently payment banks apart from regular postal services.
Post office provided life insurance before insurance sector developed in full-fledged manner. Life Insurance products offered by public and private insurance companies though offer low return on investments but provide ‘Security’ to family members in case the income earning person loses his life.
We should not under estimate role of NBFCs who are competing with banks in offering attractive return on investment on their deposits. In fact, NBFCs are in front run in providing housing loans than PSU and commercial banks with high leverage of deposits. Banks have successfully attracted deposits with insurance coverage of deposits.
To conclude, an individual has many options of savings and investment where he has to balance between security, RoI and liquidity. Small investors can enter through SIP and mutual funds, wherein HNIs can operate through portfolio management services providers. Insurance products provide security to successors with a reasonable yield on investment.
Banks provide risk free return on investment (covering inflation rate). Successful investment is hard but doesn’t require genius. In fact, Warren Buffet once quipped “success in investing doesn’t correlate with I.Q. once you are above the 25 level, what you need is the temperament to curtail the urge that get the people into trouble in investing.” Hence, an investor should not hatch all eggs in one basket.
(The author is a Chartered Accountant and senior partner in Komandoor & Co LLP. He can be reached on firstname.lastname@example.org)