Financial literacy is the process by which investors improve their understanding of financial markets, products, concepts and risks.
It goes beyond the provision of financial information and advice. It is the ability to know, monitor, and effectively use financial resources to enhance the well-being and economic security of oneself, one’s family, and one’s business.
India has one of the highest savings rates in the world, but these are invested in such instruments that do not really built long-term wealth. Investments by households have been mostly limited to fixed deposits with banks, risk-free government-backed securities.
A majority of Indian households do not use modern financial markets and only 4 per cent of household savings was invested in equity, mutual funds, etc. Unless the common man becomes a wiser investor and is educated not only on the products but also in the process of investing, wealth creation for the common man will remain a distant dream.
When it comes to financial solutions, investors tend to use thumb rules or seek advice from friends and relatives, which are often poor approximations compared to those that follow from a systematic process.
Individuals make a wide array of financial decisions through their lifetime. Examples of such decisions include providing for children’s higher education, saving for retirement, managing credit wisely, budgeting, tax and estate planning, insurance, etc. Each of these decisions is prompted by the emergence of a need. To help consumers make informed decisions, financial education is very important.
Mutual fund industry plays significant role in enhancing financial literacy among investors. The initiatives of AMC to reach out the investors through their regular mass awareness campaigns on systematic investment planning, power of rupee compounding, need to insure financial goals, etc. encourage them to save regularly using MF products.
AMC’s have lowered the minimum investment bar to as minimum as Rs 100 per month making it affordable to smallest of the small investor to participate in financial markets. This kind of affordability and building of awareness goes long way in promoting investment culture and expanding the markets.
Going forward target date retirement products (Life Cycle Funds), private pension funds, real estate mutual funds, commodity funds, etc. will evolve to take care of asset allocation changes of an investor according to his wealth or age or risk bracket.
Indians believe in culture of gifting to their loved ones, and picking up from this tradition there can be an evolution of current products to inculcate the discipline of gifting of mutual fund units to the loved one’s. This way we will be building wealth in systematic and effortless manner whose value will be realised over a period of time.
Easy access and simple products will be key factors in improving investors’ financial learning. Going ahead, low risk mutual fund products can be made available like any other FMCG product over the counter, packaged and delivered instantly. This will improve the acceptance and access to the industry and will open the gates for masses to improve and experiment with their wealth-building endeavour.
(Vikrant Gugnani, CEO, Reliance Capital Asset Management)