When it comes to developing and strengthening our human capital, we are often at odds with the fact that effort must precede results. So, we go through many years of education, followed by apprenticeship etc. Furthermore, the term ‘lifelong learning’ has recently become a buzzword, implying that the process of learning – and by increasing our earning power – never ends.
However, financial capital can be earned in two ways: the investment and the return on that investment. This is the aspect on which this article will focus.
We all want to earn more, because of the belief that this is the only way to be sure, and to insure the lifestyle we crave. While this is a worthy aspiration, we sometimes overlook two facts:
The ‘human capital’ that helps us earn our current income is a resource that gets depleted with the passage of time.
It is the way we accumulate and deploy ‘financial capital’, which will help us sustain our much-awaited lifestyle during our sunset years.
‘Money’ is a loaded word. It is not just a means of keeping count. Associated with that word is the baggage of a plethora of emotions and feelings – including greed and fear.
Investing in monetary capital usually involves handing over money to someone else with the expectation that they will use it judiciously. In addition, it can include either lending to someone or owning something. In the case of the former, a reverse [interest earned] as well as the negative side [capital loss] can be limited.
On the other hand, ownership can have nerve-wracking lows as well as highs.
In my dealings with customers over the years, I have noticed an enduring feature. They lend more comfortable than ownership.
Whenever I advise them to keep their money in bank deposits or small savings schemes of the government, they will heed it without any question.
However – across the age and income spectrum – suggestions involving equity or equity mutual funds are met with more than a slight degree of resistance. Although the current bull-run has somewhat reduced this disturbing behavior, it still persists.
Why is this?
- Belief that equities are ‘risky’
To this I would say “well, this is complicated”. Watching the daily movement of the index on your preferred business channel can assure confidence that equity leads to capital loss. However, the indices can generally show an upward move over the years. In other words, if your financial goals will be successful over a long period of time — such as seven years or more — avoiding equity could result in you missing out on a promising asset.
- a rumor
You must have heard stories of people who have lost a lot of money due to dubious ‘market tips’. However, it can also work the other way around i.e. losing money by not investing in equities.
I have seen this happen on many occasions. Even though they themselves have never lost money in equities, many young investors shy away from it simply because they have been ‘warned’ not to gamble by their elders, who have lost money in the stock market.
While I agree that one should not ‘gamble’, does this also mean that one should not invest? I circle back to the point above; In which I have shown that the probability of losing – and the probability of gaining – can increase with the passage of time. Markets today are far better regulated and transparent than ever before. They have emerged as a reliable option for serious investors and it is risky to avoid them only on the basis of such ‘well’ advice.
- The lure of ‘safe’
Investing in safe assets can ensure that your capital will not deteriorate. However, given that the returns on such investments barely keep up with inflation, they can still kill you slowly, especially if you are looking to meet long-term financial goals with such investments.
- ‘Penny-pinching’
Some people prefer investing in mutual funds, such as bank fixed deposits, simply because banks may or may not charge a fee for the ‘management’ of this money. However, in doing so they give up on myriad benefits offered by mutual funds. [variety of asset classes, professional management, tax-efficiency, etc.], These profits may exceed the reasonable ‘expense ratio’ made by the investors.
In short, we must ensure that financial capital supports us once our human capital is spent. However, to ensure this, we must be prepared to step out of our comfort zone, assess the reality of the financial scenario and take appropriate action.
Gone are the days when investors could rely on safe assets offering the same or higher interest for their retirement. They should now prepare for it by looking for good quality financial advisors and preparing an effective financial plan.
Thoughts are personal: The author is Shalab Gupta of Bibhab Capital, Agra
Disclaimer: The views expressed are those of the author and are personal. TAMPL may or may not subscribe to it. The views expressed in this article/video are in no way intended to predict or time the markets. The views expressed are for informational purposes only and do not imply any investment, legal or taxation advice. Any action taken by you based on the information contained herein is your sole responsibility and Tata Asset Management will not be liable in any way for the consequences of such action by you. There is no guarantee or assured return under any of the schemes of Tata Mutual Fund.
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