Whether paying back a student debt or investing for retirement, these decisions have long-term impact in our lives. However, we often fail to understand them due to lack of financial knowledge.
As per Organisation for Economic Cooperation and Development, “Financial literacy is a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and achieve individual well-being.”
Financial planners, advisors and trainers point that basic financial education includes an understanding of importance and advantages of savings, and avoiding unproductive loans. It also involves learning about interest rates, power of compounding, importance of time as a value of money and influence of inflation. Most importantly, in the current system, it is borrowing, investing and saving with the formal financial sector. “Most educated people are financially illiterate because this skill is not taught at home, school or college. Further, previous generations were investing in traditional and fixed return products which do not beat inflation,” said Mrin Agarwal, Bengaluru-based Financial Educator. According to Standard & Poor’s Ratings Services Global FinLit Survey of 2016–only 24 per cent adults are financially literate in India, that includes the urban educated class. It states that financial knowledge is especially important today where increasingly complex financial products are easily available to a wide range of the population. For example, with governments in many countries pushing to boost access to financial services, the number of people with bank accounts and access to credit products is rising rapidly. Moreover, in the pension landscape, participants have to decide on a plan themselves, which was previously the employer’s responsibility.
“In India, we know about conservative products, because our parents, friend and family introduced us to them, so the new generation lands up with the same. Awareness about mutual funds or equity is missing,” said Namrata Arora, Bengaluru-based Financial Trainer.
However, with the Indian government pushing for more transparency in financial transactions, today, financial literacy is a must.
Financial Advisors’ Role: Are They Devils Or Angels?
According to various mutual fund companies, more than 1,000 plus new agents are getting on board per month. The government has also recently allowed school teachers to sell mutual funds. Now the interesting question is…what these teachers will teach when they themselves have no knowledge about it.
Hence, a lot needs to be done about educating the intermediaries too. The mutual fund firms should act the way the insurance industry has developed healthy intermediaries.
But will people pay for financial education or advice? “It is well known that Asians do not like to pay for financial advice. This leads to adhoc investing and choosing products based on recent performance. This needs to change,” said Agarwal.
This is critical since the efforts taken by the government and private financial institutions seem to be inadequate, said Amit Trivedi, Mumbai-based Financial Advisor and Investment Trainer.
Financial Literacy Initiatives
RBI’s Project Financial Literacy disseminates information about general banking to various target groups. Meanwhile, Sebi certified agents organise workshops on various financial aspects across the country. Sebi also conducts investor education programmes through investor associations and regional seminars through various stakeholders.
Insurance Regulatory Development Authority’s initiatives on financial literacy include sustained campaigns in print, radio and electronic medium. It also conducts an annual seminar on policy holder protection and welfare and partially sponsors seminars on insurance by consumer bodies. The Pension Fund Regulatory and Development Authority, meanwhile, is focused on spreading social security messages to the public.
However, despite all these efforts, India lacks financial literacy. “Financial literacy was 24 per cent in 2016. It may have gone up by a few more per cent following the digital push by the government, but we are still inadequate and certainly far from an evolved financially literate society,” said Trivedi.
“We are literally scratching the surface. In equity, India has just three per cent exposure as against about 34 per cent in the developed markets,” Arora further added.
Despite growth in attention, individual investors are reluctant to implement it. “Lack of financial literacy is one of the main reasons for people losing money in various ponzi schemes,” opined Arora. Till today, people don’t know what to do to start an investment, savings and insurance.
For example, The ‘Mutual Fund Sahi Hai’ campaign has attracted many, but, industry experts opine, it does not provide the investor with right education on the funds available. “In a few cases where the efforts are put in to provide financial literacy are disguised sales efforts. It has increased awareness but not the ultimate objective of financial education,” concluded Trivedi.
Amidst such financial literacy status, people will still need handholding when it comes to financial education, while more needs to be done.