Nifty Midcap Index has given a CAGR of 15.33 per cent in the last 15 years which implies a 6.37 times growth in your invested amount, why haven’t investors seen these real returns in their portfolios?
Can India democratise successful investing?
Can we create a generation of better investors? Is customised financial advice possible regardless of location or investment threshold?
Mutual Funds, which is the right investment vehicle for the masses, has failed to attract as many investors as they should have. Unfortunately, the number of investors in speculative gaming platforms and cryptocurrencies is 3-4 times higher than the number of mutual fund investors in the country. Most stakeholders focus on promoting “asset allocation” and “market-beating returns” or “alpha”, rather than a goal-centric investing mindset. These concepts are typically favoured by investors who have already made money in the past or have inherited it and are now looking to generate income from their corpus while managing risks. However, this mindset applies to less than 0.5% of the entire population of the country.
Who misses out? The entire middle class, lock stock and barrel. For a product that takes pride in being right for everyone, this is extremely unfortunate. Mutual funds provide a perfect platform for wealth creation. It is an asset class that is professionally managed, transparent, low-cost, and customisable based on risk. It is strongly regulated and has the potential to create wealth by beating inflation 2-3 times over in the long run. The middle class has significant aspirations and objectives, and they are willing to sacrifice their present to save small amounts for a better future. They are not focused on outperforming the market but rather on achieving their goals. Good returns are a result of proper investment processes and behaviour. Pursuing high returns is like putting the cart before the horse.
A recent industry report by SEBI revealed that less than 3 per cent of investors continued investing after 5 years. Shockingly, 73 per cent of investors could not continue their investments for even 2 years. As per a study conducted by JP Morgan on US investors between 2001 and 2020, the S&P 500 provided an annualised return of 7.5 per cent. However, the average investor was only able to achieve a return of 2.9 per cent during this same period. The study showed that the primary reason for this significant loss of returns was due to the inability of investors to remain invested. Regrettably, most of the advice provided to the general public is geared towards selling rather than aiding investors in achieving better returns. Individuals are often seeking investments that generate the highest possible past returns, but there is little guidance provided on managing volatility, constructing resilience, and capitalising on compounding by staying invested.
Many scalable business models that had the potential to participate in financial inclusion have failed to do so, mostly because they were focused on acquiring new clients at any cost. To do so, they often showcased short-term returns and fueled greed to increase their customer count. New investors often fall into the recommendation trap where investment products are positioned before the assessment of people’s needs. Customisation is often not taken into consideration, and greed is exaggerated while risk is underplayed. This creates a false impression that wealth creation is super easy and can lead to poor investment decisions.
Unfortunately, there are very few investing platforms and experts in the country who cater to the needs of the general public. Most of them are busy serving high-net-worth individuals (HNIs) while the majority of people don’t have access to the right advice and end up being sold unsuitable products such as insurance, which are marketed as investments.
This lack of personalised advice, tailored specifically to the investor, is the root cause of the discrepancy between investor returns and investment returns.
The key factor behind great returns are not primarily the selection of funds, but the ability to remain invested. Investing resilience is built on strong beliefs, processes, discipline, joint decision-making with expert guidance and setting the right expectations. However, there are very few business models that allow for such resilience to be developed. The bottom-line is don’t let anyone take away your investment returns. Follow a robust investment process, set clear goals, build resilience to market fluctuations, seek help from an expert, and remain invested. Creating wealth is not as easy as it may seem. If it were, simply searching the internet for the top-performing fund would have made us all millionaires!
(The writers is CEO, FinEdge)