Are fixed income investors financially illiterate?

Published: April 14, 2016 at 9:11 am

Any keen follower of personal finance space would have encountered their fair share of ‘why you should invest in equity?’ articles and ‘why equity alone is capable of beating inflation over the long-term’ arguments.  Things have come to such an end that fixed income investors are considered as not being financial literate. This kind of judgemental and holier-than-thou attitude is extremely unhealthy.

It is one thing if AMCs and product distributors act like that. It is their job to sell equity and it is no surprise that they do so. Should we investors also sit in judgement of others and assume fixed income investors require financial literacy?

When Saina Nehwal told ET that she prefers fixed deposits to equity, blogs, forums, Twitterati, magazines were all busy discussing why she needs to be educated. Well, it is her money and her choice! Perhaps we need to be educated about that first?!

Take a typical thread at Facebook group, Asan Ideas For Wealth, where a member wants information about an insurance product with an investment component. The rest of the members (me included) talk about why such policies are a bad idea, and why one should not mix investment and insurance. You know, the usual refrain.

Why should we offer unsolicited advice that choice X is wrong and choice Y is right, with a preconceived notion that we are trying to help? Why should everyone invest in equity?

Some, well many, in our country simply cannot stomach volatility. Yes, it would be a good idea for all of us to participate in the India story (assuming there is one), but it is a choice to not do so. AMCEquity penetration ought to be organic. Investing with borrowed conviction or upon persuasion is wrong per se and unlikely to last.

AMCs will disagree with me, but I think equity penetration ought to be organic. Investing with borrowed conviction or upon persuasion is wrong per se and unlikely to last.

When someone is looking for ‘safe’ or ‘best’ investment options or want opinions on fixed income plans, I would prefer to suggest the use of a goal planning calculator with reasonable inflation value and the amount that one can invest. The one in this post, A Step-By-Step Guide to Long Term Goal-Based Investing gives the portfolio return after taxes necessary to achieve a goal. Perhaps this is unsolicited advice too, but I do hope it is not as judgemental. Or maybe we should leave them be.

In general, we need to think in terms of the return required. Only can then can we stop and think about what return the product that we are comfortable provides and if we need to get out of our comfort zone and wade in fresh waters. For many it is equity and for some, it is fixed income!!

Let us (the investor community) point each other to ways of making an informed choice without assuming that anyone who is not thinking like us is wrong. The rest is up to the individual.

Beating inflation is essential for long-term financial goals, however, there is no need for equity to do that! There is no need to obtain a real return to beat inflation! Read more: There is more to investing than obtaining real returns.

The syllabus for financial literacy is quite short and equity investing does not figure in it! At least not in my book. Before dubbing fixed income investors as financial illiterate, let us stop and ask if we are, in the first place.  To those who ask with an open mind, the answer could well be surprising!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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