Last Updated on March 18, 2015 at 8:30 am
If you type the following in Google: “Sukanya Samriddhi account risk averse”, you will find several articles that suggest that the Sukanya account is ‘suitable’ for risk averse investors.
Such statements make me want to throw up. Risk aversion almost always means that the person does not understand the risk involved with a particular investment objective.
Almost always, this means that the ‘risk averse’ investor is unable to fathom the impact of inflation and would like the comfort of a steady return which is ‘higher’ than other fixed income returns.
How many of these investors, who value ‘peace of mind’ associated with fixed returns, are aware that there are only two ways to beat inflation?
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1) invest as much as possible in assets (as part of a diversified folio) which have every chance of beating inflation
2) invest an enormous sum in a fixed income instrument with a return lower than inflation.
How many of these investors can justify their choice of a fixed income instrument with adequate investment? How many are aware of the kind of inflation associated with services related expenses like a child’s education and marriage? How many have even bothered to use a goal calculator?
Risk Aversion most often implies Risk Ignorance.
I can never bring myself to fan the flames of ignorance by suggesting ‘solutions’ for risk-averse individuals.
A risk-averse individual who does not understand the risk of not investing in equity has only one ‘choice’: invest a lot! If they took the trouble of using a goal planner with realistic inflation levels, they would realise that the monthly investment required is a typically lot more than they can handle.
There is no free lunch. If you don’t want to stomach the ups and downs of the equity market, you will have to pay a heavy price in terms of a higher monthly investment. Only then would products such as the Sukanya Samriddhi account become suitable for ‘risk averse’ investors.
Financial advisory involves gauging the individual’s risk appetite, analysing the risk profile of the goal and convincing the person to align investments to a goals risk profile and not individual risk appetite. This a huge challenge for a financial planner- even for those with the passion for advisory.
As someone who does not have the ‘stomach’ for one-to-one financial advisory, I believe my job is to the provide clinical solutions in line with the risk profile of a financial goal.
Suggesting inefficient solutions to risk averse individuals is like evaluating certain sections of a class with a relaxed set of rules because they can’t handle the rigour.
This is a ‘disservice’ because life subjects everyone to identical rigours -in this context, inflation.