The last fortnight has been good for our money. Europe looks as if it will survive a while longer. The US bit the bullet and gave an annuity to the people printing dollars. Closer home, the purge in North Block was completed and most people cheered as baby steps of reforms got taken. Markets are up in response though the scepticism about the political spine to push through these baby steps remains. While the macro events played out, the tiny community of financial planners in India exhaled. It’s been difficult to keep the faith in equity going and the systematic investment plans (SIPs) funded specially over the last one year. The point to point five-year equity return looked terrible, especially in comparison with fixed deposits and gold. But those who remained invested, had a good portfolio of funds and continued their SIPs would have seen a change from red to black in their account statements. A point-to-point comparison for a period less than 10 years is a poor measure of equity return, a better indicator is to look at SIP returns. Try any SIP calculator (there is a good one on www.valueresearchonline.com) and put in different dates and times to see how little difference the choice of an SIP initiation date makes. Also true is that a chunk of the pull-back happens in the early days of a reversal of a bear phase, but retail investors like us tend to lose faith as the downturn is bottoming out and exit. By the time we get back in, the multiplier that can really boost returns is over. One of the toughest tasks for a financial planner is to manage the expectations of clients, both in boom and doom times. One argument that I find powerful (and use to stay invested myself) is this: We know that over the long term, equities will outperform most other asset classes. This is especially true of growth economies and India has 30 years of growth ahead, but the biggest threat to us is our own politics. If growth unravels, we’re looking at huge social unrest—the demographic dividend will turn into a bomb. There are then two scenarios—doom or boom. The luxury of a stable 5% growth does not exist for India—we’ll unravel if the economic ambitions of the bulge of population pouring into the workforce are not addressed. The investment choices in such a scenario are only two: go full into gold if you think we’ll implode (not even land, gold you can carry out of the country) or remain invested in a basket of products and believe that the politics will come around. I stay with the SIPs. Happy to report that after a long period of red on the account statement, this week begins well. The green shoots of black are back.
End Note: Reading a book can have a direct impact on behaviour. I saw it happening to me last week. I’m reading Portfolios of the Poor (www.portfoliosofthepoor.com), a must-read for those working with money and the poor in any way. The authors, through documenting the daily financial lives of about 300 households in Bangladesh, India and South Africa, show that the poor have very active financial lives and use a complicated mix of financial products and solutions to manage cash flows, risks to their precarious lives and savings. My key takeaways were two. One, it is not asset-creating credit that is the chief need of a sub-$2 a day family, but tiny amounts to manage cash flows to keep food on the table. The need is both for short-term consumption loans and easy to access and safe places to keep tiny daily or weekly deposits. Two, the lack of formal finance to provide these products (micro consumption loans and a Rs.10 a day savings plan) makes the poor very dependent on their communities for financial support. Neighbours, usually from the same community, are used both as sources of tiny tide-me-over loans and as repositories of deposits to hide the money from own consumption needs or an alcoholic spouse.
I’m reading this book and the house help wants a day off. Sure, so what’s happening? Anita’s daughter has run off. With a boy from another caste. The community panchayat (this is New Delhi, but we’re now in the dirt lanes of an urban slum that has its own rules and these are imported from the district that they come from in another state) rules that to prevent ex-communication she must feed all the unmarried girls of the community and do a prayashchit pooja with gifts and food for the priest. I swallow the urban mass affluent words of advice on how caste does not matter and the uselessness of local panchayats. If ex-communicated, Anita (who is banked and has formal financial products) will lose the community support that helps in both social and financial matters. A second generation Delhi migrant, she is not even part of the sub-$2 a day household, but has built assets over time. But the seamless support system the community gives is more than what any bank or formal financial product can give. The girls are fed. Pooja is done. Anita is talking to her daughter again. And the community fabric expands to include an other-caste family.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at email@example.com