For Aditya Kothari, 41, investing initially meant choosing tax saving products and ‘safe’ assets like real estate. “I wanted to get into tax saving instruments, but I was a victim of an insurance agent and ended up paying huge premiums," said the marketing professional. But Kothari is not alone when it comes to being risk averse in terms of investing. “Human nature is designed to give more weightage to the fear of loss over the pleasure of gain. We are particularly fearful of losing hard-earned wealth," said Sunil Sharma, chief investment officer, Sanctum Wealth Management. But your 30s and 40s are the perfect time to shed your inhibitions about market risks and invest to make your money work for you.
Fear is natural
According to Sharma, fear and greed are the two dominant emotions in the market. But since risk and returns are interrelated, investors must work towards overcoming it to build wealth. “Paranoia normally rises during market volatility. Investors’ emotions dramatically impact their decision-making ability. Most often, investors have an unfortunate experience and then swear off equities. This impacts long-term portfolio returns dramatically," he said. Adding that one way to get over fear is to learn the ins and outs of the market, so that one can use volatility in their favour.
For Kothari, it was taking a holistic approach to financial planning that let him move beyond the world of safe investments that didn’t inflation-adjust his long-term investments. The real wake-up call came when he realised how little he would get as maturity amount in his policies and PPF, and that it might not be enough to cover his son’s education and his own retirement. “I started reading up on the subject, scouring financial newspapers and magazines," he said. What worked for him was choosing equities as an asset class for his long-term goals.
Risk in Safety
According to Deepali Sen, founder partner of Srujan Financial Advisers LLP, Kothari’s initial mistake is shared by a lot of investors. “People don’t realize that taking a risk is necessary if you want your returns optimized over the long term. They question why they should take up risk if they can do without the additional returns," she said. According to Sen, investors don’t consider the inflation-adjusted returns they will receive from safe investments like fixed deposits, and that this can cause a shortfall in their corpus to meet important financial goals.
Learning is key
It is only when Kothari started learning about investing in earnest, that his fears were truly dispelled. Sen agrees that investor education is key to keeping people invested over the long term. “Fear can be managed by reiterating that asset allocation can help manage volatility and enhance returns," she said.
Being risk averse can be inherent, but when it comes to money, information can help you shed some of that fear. Invest your time like Kothari in learning about financial planning.
Take a holistic approach to your money life, define your financial goals and then mark the assets you need. Knowledge c is power when it comes to dispelling the fear of risk. Educate yourself about the instruments you choose to invest in, and seek an expert’s help if need be, to keep yourself from spiraling into paranoia.