Home / Money / Personal Finance /  Financial literacy is important for wealth creation

Work is a necessity. But work does not automatically lead to wealth. What most people really want is wealth. Capital markets offer an important approach to building long-term wealth. Many, especially people in core banking, fail to see this and are only doing what they know best. Long-term wealth creation is not rocket science anymore. There is a need to look beyond the havens of history—bank accounts and return-linked insurance. Raising awareness is key and the burden of doing this must fall on those who know better.

The average worker is a small cog in a mind-numbingly large wheel called the economy. From year to year, workers earn, spend and save with no thinking time. For many workers, data show that the money saved sits idle, many times, in a bank deposit or an insurance policy that promises a “return". Awareness that money is capital and that it can grow faster is low. Often, this increase is significant. Multiple times higher, compared to what the average “hard worker" would have ever imagined. As the great economist and thinker Adam Smith said, “money makes (more) money". What many savers fail to understand is ways in which money can earn money. People try stock punts, lotteries and all kinds of illegal quick fixes. Despite known massive failures, success stories become deeply entrenched in the social lore.

Poor awareness of what works is not limited to the average retail “worker". Institutions and people selling their products, perhaps sell what they sell as they think it is the right thing to do. Consider this: Reportedly, after having (miss)sold 50 million policies, in 2013, a major life insurance company withdrew the policy in question as it caused losses to policyholders. Core banking professionals I know have a poor understanding of products and big picture concepts. Just a month or so back, a tier-3 city shopkeeper friend wanted to invest through the National Pension System (NPS). The shopkeeper’s banker (big well-known bank) tried hard to dissuade this shopkeeper from transferring his tidy savings from his savings account.

Unless someone is really evil, why would anyone want to misguide at all? The root cause is perhaps financial illiteracy. Bankers and insurance agents I have talked to are comfortable in parking their own hard-earned money in all the inefficient uses of surplus money one can think of like savings accounts and insurance products that promise a return.

A lack of understanding of how wealth accumulates creates ever expanding wealth gaps. Savers find comfort in imitating people in their social circles. In this, bankers have an important role to play. At least in tier-3 cities and beyond, the banker is a source of trust. But if members of the banking community are not in the know, a large part of the ecosystem gets locked into a savings account inertia.

In the past two decades, the Indian stock indices have grown over 15 times. Most savers have missed India’s steep economic ascent. The good news is that India is perhaps not even at the halfway point. With sustained economic growth, the Indian stock market capitalization is likely to grow much higher. If India matches China’s current market cap, the indices will have to rise many more times than their current level.

Government-recognized alternatives such as mutual fund investing or the National Pension System are now just a few clicks away. The question is, how many of the foot soldiers in India’s financial services ecosystem understand this and or believe in India’s growth trajectory? An institutional push for upskilling product knowledge is an urgent necessity.

What should the average saver be doing? The most important thing to do is to make investing a priority. Search for and talk with Securities and Exchange Board of India registered investment advisers. Here is a handy list of international best practices and questions to ask. Spend time reading. John Bogle’s The Little Book of Common Sense Investing is an easier book to read. Not everyone reads English. However, those who can but haven’t started need to get themselves going.

The biggest ally all investors have is time. Between equities, fixed income and gold, equities are the riskiest. But over 20 years, the risk of a financial loss from investing in a passive broad index is nearly zero. Index or passive investing gives the investor the average return that the market delivers. However, over time, average returns do wonders. Ironically, hugging to the average ensures that the “average" investor actually wins with negligible risks of a loss. Among others, the NPS offers this and more.

I have no idea what you do as an investor, but the challenge is to get convinced of the transformative, yet simple, long-term investing opportunities India has.

Shreenivas Kunte is CFA, CIPM, director, Continuing Education and Advocacy, India at CFA Institute.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout