16 May 12 Urban Indians’ financial planning flawed
The recently released HDFC Life ValueNotes Life Freedom Index highlights several key lacunae in the way urban Indians plan their financial investments.
Even as we appear to be increasingly aware of the need for planning, our awareness or knowledge is limited. Many pundits have highlighted the lack of “financial awareness” in our society. But the HDFC Life ValueNotes Life Freedom Index is one of the first serious attempts to delve deeper into the components of awareness.
While a majority of the respondents appear to know of the different financial products on offer, such as mutual funds, insurance, bank deposits, equity, etc.; there is a lack of awareness of fundamental financial needs.
People are cognizant of “expected” events that may require substantial financial resources – like a child’s education or marriage, purchase of a house or durables. However, awareness of unexpected events such as illness or death is much lower. This implies a focus on the medium term rather than the long term, and on events that are “visible” as opposed to more distant and “invisible” events.
Even worse is the knowledge of environmental factors such as inflation, interest rates, economic or market cycles. Given the recent volatility in financial markets, this is quite surprising – and points to a fundamental lacuna in how we Indians think about investments.
This dichotomy in awareness is revealing. We know about the various products – so obviously the high-decibel advertising by financial services firms is making an impact. But our understanding of why we are investing is very poor. If we don’t know what we are protecting ourselves from, how can we choose the most appropriate instrument? And how can we even begin to design a suitable financial plan?
Clearly there is a crying need for better education and advisors. Anecdotal evidence suggests that those selling financial instruments are focused on the short term, and don’t bother about long term planning, especially for old age needs.
But there is no point blaming advisors – after all they are driven by commission structures. It is our life, and having someone to blame is not going to take away the pain of inadequate finances in our old age. It’s time to educate ourselves. And our children. This knowledge might well turn out to be more useful than how to crack an engineering entrance exam!