'Greed' travels faster than 'Need'

I heard this absolute gem from my friend Amit Trivedi, a well-known  author. Trivedi travels all over India conducting investor awareness programmes.  At one of his recent programmes in a remote border state, he asked the audience if they had heard of mutual funds. No, they hadn’t. Had they heard of National Pension Scheme? No.
 
Had they heard about any financial products apart from fixed deposit? Yes. Some of them had invested in bitcoins. Apparently, the lack of reliable internet access or aggressive salesmen was no hindrance to making these exotic investments. Nobody it seems was immune to the ‘get rich quick’ mania. On the other hand, Trivedi had to ask if they had seen the much acclaimed “Mutual Fund Sahi Hai” campaign and some of the audience members acknowledged seeing it though it had not made enough of an impression on them as they had already professed lack of ignorance about mutual funds.

 
What Trivedi encountered is not new. Ponzi schemes spread quickly across geographies with the initial investors bringing in ever increasing number of new investors. Greed is clearly contagious.
 

Apart from greed, another factor that affects the spread of this virus is the inability of the human mind to comprehend what constitutes a reasonable rate of compound interest. A common refrain among clients is that they are not greedy – they would be happy to get a ‘conservative’ return of 20 per cent a year.  I have now learnt how to face this by asking them examples of the best 10 years plus investment made by them. Most of them usually give examples of their real estate investments that have been with them for decades where they invested some thousands and reaped in millions. It is only when I work out the actual return earned by them on such investments they realise that the actual return though good is nowhere near the 20 per cent a year mark that they had imagined. It takes good one-on-one counselling to convince them that any returns beyond the bank fixed deposit rates come with attendant risk.

 
This is where media and financial literacy can come in. Over the last few years, enormous work has been done on financial literacy such that term plans have become the accepted norm and mutual funds are slowly being recognised as one of the most investor-friendly investment instruments (maybe not in remote areas, as Trivedi discovered, but at least among a bigger base of investors than before). But the basic building blocks remain unconquered.
 
A massive campaign is needed to enable the lay investor to recognise and understand that higher return comes with high risk and that return in double digits invariably comes with the risk of loss of capital. This kind of campaign can only be carried out by the regulators or from the investor-protection funds lying with the government. This will need to be complemented with the various financial literacy efforts already being made.

 
We will need to educate the layperson to recognise greed if we intend to stop its march. Otherwise ‘Greed’ will continue to travel faster than ‘Need’ as before. 
 
The writer is a Sebi-registered investment advisor