It is important to take time and understand if your perceptions of risk are flawed
Last week, I did a financial well-being session at a well-known corporate house, the participants being predominantly women in their 30s. While they were all keen on taking charge of their finances and made for an attentive audience, most of them were extremely risk-averse. I work with a lot of women and with men too. In most cases, the women are far more risk-averse than the men. Even so, meeting a group of women, all of who were shying away from investments which they perceived as risky and chose to invest in less-efficient products, was quite startling.
Let me explain why. If you recollect the formula for compound interest, the variables are principal, rate of return and time. Of the three factors, the rate of return you receive is not controlled by you, whereas the other two are. If you invest a sizeable sum and give it time to grow, you are bound to create wealth. And when you invest in equity either directly or through mutual funds, compounding weaves its magic and can create a large corpus if you are disciplined and patient.
Staying away from equity
Now, look at the one factor that distinguishes a lady investor. Most women are not in a hurry. They are very patient, and once they understand the way a product works and have realistic expectations of the short as well as long-term performances, they wait out the turbulent times patiently and truly stay put for the long term.
Given this fact, it was surprising to see that while most of the women mentioned earlier had invested sizeable amounts and were prepared to stay the course over the long term, they had chosen products such as the PPF (15-year maturity) and five-year bank FDs. They were shying away from equity since they perceived the volatility in the short term as a risk.
There are several compelling reasons for women to take more interest and understand the best options available to them when it comes to investing. Here are the three important ones.
- Lower lifetime earnings: The first reason for you to get into the wealth-creation bandwagon as early as you can is the harsh reality that women earn less than their male counterparts in most cases. This, coupled with the fact that you are likely to take more breaks in your career, means you should not let go of opportunities that let your money grow exponentially.
- Higher life expectancy: Second, the life expectancy of a woman is higher than that of a man. This means you are likely to live longer and hence will need a larger corpus to take care of you in your sunset years. Also, the comfort which you enjoy currently in delegating your financial decisions to your spouse may not be there always. At some point, you will have to be in the driver’s seat when it comes to your money. So, why postpone, given that it may be too late afterwards? It is important for you as a woman to understand and participate in your family’s financial decisions for your own financial security in your later years.
-Higher morbidity: Counter-intuitively, while women live longer, they are likely to have higher health costs in their old age! Research shows that while men have higher occurrence of more lethal diseases (e.g., Heart conditions, Strokes, Diabetes etc.), women have higher occurrence of non-lethal yet debilitating conditions (Arthritis, Osteoporosis, etc.). Hence, along with lower incomes and savings, women may need to also contend with more frequent health complications as compared to men, thereby requiring a sizeable pot of money for treatments.
Changing risk perceptions
Given all these factors, it is important to take time and understand if your perceptions of risk are flawed and, more importantly, risky for you! How do you define risk? Is it the possibility of not meeting your expected returns (for your planned goals) or the possibility of losing your capital (albeit, temporarily) in the short-term, even when you have invested for the long-term? If it is the former, it is true that at a given point of time your returns may not be as per your expectation when you invest in equity. But if you choose your mutual fund/PMS/equity right, it may only be a question of keeping your nerve and being patient and giving your investments enough time to recover.
However, if you are stay away from investing in equity because you are afraid of the short-term volatility, it is time to think again. If you decide to invest for your long-term needs and choose your product well (you should outsource that bit by engaging a trust-worthy professional), you will see that the risk of losing capital is negligible, and you can build substantial wealth that can help you meet your goals.
But if you choose to invest in more traditional products, (e.g., in the above case, women were investing in FDs and RDs), the returns on these products after providing for inflation and taxes are negative. Which essentially means that not only are you better off spending your money today than saving it for a rainy day, you run the risk of not having enough saved up for your later years, when you need it!
So, dear woman investor, by seeking “perceived safety” in your investments, are you emulating the investments of the previous generation and running away from “perceived risk?” If yes, pause and take a moment to think – you may be taking the biggest risk of them all – which is not taking enough risk at a time and age when you can!(The writer is a Certified Financial Planner and Founder of Finwise Personal Finance Solutions)Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.