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Imbibe the art of managing financial risks

Author: Balaji Rao/Wednesday, April 17, 2019/Categories: Exclusive

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Imbibe the art of managing financial risks

Vishal was happy and was in a celebration mood when he got his first salary credited to his bank account. On his way from work he purchased sweets for his family comprising of his parents and younger sister. After dinner his father called his son to the sit out while his mother too joined the conversation. His father was 55 years and would retire in the next 3 years; his mother was a homemaker. His father asked his son about his investment plans for which Vishal apparently said he had yet to take the decision of where and how much to invest from his earnings.

The aging father without mincing words started advising his son to invest in PPF, recurring deposit and not to venture into risky assets such as equities. Vishal curiously asked about mutual funds if he can consider them for investment. His father recommended with a stern voice to avoid such investments which are “risky” and to stay away. His mother too chipped in advising her son to invest in chit funds and also instructed him to start buying gold as much as possible.

This is the typical conversation in an Indian household where parents try to take control of where their children have to invest their savings. Apparently, there is a joke that is circulating around after Infosys completed 25 years of success as a listed company; a young man who had Rs 10,000 to invest in February 1993, the month and year Infosys conducted its public issue, asked his uncle if he should invest in the IPO of Infosys who was offering the shares at Rs 95 per share or to invest in fixed deposit that was offering 14 per cent annual interest. The uncle scolded the youngster asking him if he was out of his mind to invest in a stock that was risky and strongly recommended to invest in fixed deposit that was safe and secure. Taking the “advice” of his uncle he invested the money in a bank deposit. Today, his uncle is no more, but that young man who is in his 50s curses him for the ill-advice he was given.

There are few factors that today’s aging parents fail to consider while advising their children. (a) They forget to consider the fact that the rate of interest of fixed deposit has dropped from 14 per cent to under 7 per cent over the last 20 years; (b) They fail to forecast the future where the bank interest rates are expected to drop to as low as 3 per cent in the next two decades; (c) Sensex that was at 3000 levels 25 years ago is trading at 39000 levels today; (d) a 24 year old multi-cap oriented mutual fund that started its NAV at Rs 10 is now trading at Rs 700.

Taking risk is not a choice anymore; the times have changed and there are enough empirical evidences that can prove that equity can be a dependable asset. Let your young children manage risk than avoid it. Stand by them and teach them how to manage financial risk rather than imbibing a risk-averse culture. They will look at you proudly when they turn your age for the learning you imbibed in them. 

The author has written six books on investing and personal finance. He has 23 years of industry experience and six years in academics.

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