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Move from spending to saving, and invest wisely

The demonetisation move has forced people to move from being completely cash driven to now using formal banking channels

One of my friends who runs a boutique called to ask how she could start investing. On enquiring why the sudden interest, I got to know that most transactions in her business were in cash and she would keep the earnings at home and use as and when required for business or personal purposes.

Now that she had deposited the cash due to demonetisation, she was enquiring about investment options. She herself was happy that she had to deposit her earnings into the bank, as now she could actually invest the money rather than spend it frivolously. Moreover, she had also adopted digital payment options for her business to continue running smoothly.

The demonetisation move has forced people to move from being completely cash driven to now using formal banking channels. Micro-businesses have also been forced to take up digital payment channels to keep their businesses running.

For the longest time, despite all the government messaging, most small businesses continued to transact in cash and were not keen on having any form of payment options other than cash. 

With people realising that they have surpluses to be invested, the bigger challenge is to now educate them on how to invest this money rightly. In my friend’s case, she just wanted to invest her money in a systematic investment plan (SIP) for 3-4 years and had no goal attached to this investment. This is the way most Indians invest—they put the money away in the latest well-performing scheme for 2-3 years and hope to make great returns. 

During my sessions, what comes out is the ignorance about financial instruments and the unwillingness to educate oneself on the various options available.

Also, each person wants an easy way to invest. One of the main reasons why endowment policies or unit-linked insurance plans (Ulips) are bought is because there is always an agent easily available, who gets papers signed and, more often than not, positions the policy to give an X amount of money after a certain period, as though it is a fixed return.

I find that even among the younger lot, people are not willing to take risk; they look for guaranteed returns or instruments with tax-saving benefits. Most look at the Employees’ Provident Fund (EPF)—which is meant to be for retirement—as a saving tool for the downpayment of a house. 

What also worries me is the fact that people are investing in SIPs for short periods, based on friends’ advice, and without a goal, based on the fact that it has given attractive returns in the past. 

And, of course, propensity to take loans is high among young investors. 

With household financial liabilities growing at almost double the rate of household savings, how can the larger population be educated to manage their finances in a more structured manner? What should be done to make people move away from investing their hard-earned money in traditional instruments that do not beat inflation and may not be tax efficient? And how does one get people to realise that thinking long term and taking some risk in a portfolio is important in order to have enough money to do the things that matter most to them? 

First, a behavioural change towards savings is important. The thought of saving before borrowing has to be inculcated through life skill sessions on money management at colleges. At present, very few colleges focus on this life skill, even though it is important in an individual’s life. This needs to be driven by colleges rather than making it voluntary. 

Schemes with tax benefits are always popular and some of these schemes could be used to inculcate long-term goal-based investing. Apart from that, some changes could be made to existing schemes. For example: 

a) For salaried people, increase the EPF lock-in period to 15 years (full and partial withdrawal is flexible at present), and maybe increase the employee contribution to 15-20%. This way, employees are forced to move a larger part of their earnings in a scheme that gives tax-free returns, beats inflation and compounds. More importantly, it is invested for the long term. With lesser take-home salary, loans would be taken only for necessary purchases such as a home, rather than for funding vacations and gadgets. 

b) Make annuity or pension tax-free to promote schemes such as National Pension System (NPS) are long-term in nature and give partial liquidity. These offer a good mix of bonds and equities.

c) Allow mutual fund pension schemes to have the additional tax benefits the way NPS has, as they provide better liquidity and would give the public more options to invest in than just NPS. 

d) Most Indians don’t have and may not be able to afford financial planners. To propagate goal-based investing, mutual fund schemes targeting specific goals like children’s education, should at least be given the same tax sops as child policies from insurance companies, to give investors a wider choice. 

Financial education and propagating financial wellness is important to get people from spending to saving, and then to investing in the right instruments. Financial education with availability of long-term schemes is a good way to inculcate good investment habits among the larger population. 

Demonetisation has been a great way to move people to use formal banking channels. Now it is time to take them to the next level by educating them on how to plan their finances better and lead a financially prudent life.

Mrin Agarwal is financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra.

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