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Do you worry about the wrong risk?

One thing that came out from our discussions was that a lot of savers go for financial products based on their perception of how “risky” they are.

We recently spoke to many savers and investors about their financial goals, investment approaches as well as their apprehensions. One thing that came out from our discussions was that a lot of savers go for financial products based on their perception of how “risky” they are.

People choose FDs because they at least have the assurance that they will get back what they invested. Similarly many parents choose child insurance plans which are fixed return products (you invest a set amount for a set number of years and you will receive a fixed pay out normally referred to as sum assured) in the hopes that their investments will give them a “guaranteed” amount at the end of a certain number of years.

Is there something wrong with this?

Many of you who have been investing for a while, would spot the obvious problems with this approach, or rather way of thinking. However, are individuals or parents wrong in their expectations?

Not if you think about what risk means to them. Risk, to a market analyst is a cold mathematical concept linked to standard deviation. To a parent investing for their child’s education or to someone saving for a nest egg, it is really about “losing” their money in its entirety.

India has had its share of fly by night financial operators, dodgy companies who get up to accounting malpractices that amaze regulators, and promoters that have defaulted on debt that is in the thousands of crores.

When Indians read about this on a daily basis, then it is quite understandable that their perception of risk is largely about whether they will lose their money.

There is however a bigger “risk”

When we try to combat the risk of losing our savings by investing only in “safe” investments like a fixed deposit or even insurance plans with fixed pay outs, we are unknowingly making certain an equally bad result.  

That result is that we will not have the needed money to make a difference in our ability to meet our financial goals. We might think Rs 15 lakhs is a big amount to receive for our child’s education from a child insurance plan, but what if it’s enough just for a year’s college education?

Education inflation tends to run far higher than everyday inflation and has so far been increasing by about 10% per year.  Investing in something that returns only 6%-7% is almost the same as saving for a partial education. This is perfectly fine if you want to fund only part of your child’s education. Not so much if you want to fund the entire thing.


Fear can be controlling. We understand that. But if meeting your responsibilities to your family is important to you then you need to seriously consider if the fear is justified. India may have seen its bad times and worse people, but at the same time the country has progressed and more so its economy. 


The risk of losing money versus the risk of not meeting your goals

Fear can be controlling. We understand that. But if meeting your responsibilities to your family is important to you then you need to seriously consider if the fear is justified. India may have seen its bad times and worse people, but at the same time the country has progressed and more so its economy. 

Which is why investing in proven and well diversified equity mutual funds works for long term goals. You might be afraid that this can be too risky, but over time the longer you stay invested the lower the risk of losing your money. Historically only equity beats inflation by a respectable margin. This is extremely important if you want to meet your big goals.

Think of your goals first, then the asset class (equity or debt) that the goal needs and then finally the instrument. If you approach your financial planning this way, you are far more likely to not just NOT lose your money, but also meet your goals in time. 

The choice is finally yours, whether you give in to fear or understand it and do the smart thing.

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