Why you need to be financially literate to make the right investment decision

Published: June 6, 2018 1:43:12 AM

You are investing your money in financial products, and for that you have to look at the marketing literature.

financially literate, investment, right investment decision, financial investment People who are not from a financial background and are investing in financial products, need to develop basic understanding of the product.

People who are not from a financial background and are investing in financial products, need to develop basic understanding of the product. Even if you are putting your money in a professionally managed vehicle such as mutual funds, you should know the basics of where you are putting your hard-earned money. Everybody, whether one is taking the inputs of a financial adviser or not, needs to learn every day, needs to be aware of what is happening around, and develop or polish the basic appreciation of finance and investments.

You are investing your money in financial products, and for that you have to look at the marketing literature. However, anybody can fall for the way a financial product is marketed and pitched.
Qualified professionals, even from fields other than finance, tend to develop a sense of what is relevant. They only need to pick up the basics of finance. Financial illiteracy, i.e., lack of knowledge of the basic concepts of finance, is prevalent among people who are otherwise qualified and successful, in various walks of life.

How to do it?

You have to understand the basics of investment, and it is no rocket science. Rather, it is common sense. There are enough media reports educating us about financial planning and investments. You just need to pick up the relevant sections of the media, covering basics of financial planning and the basic concepts of financial products on offer.

What you should not do is fall for the ‘noise’. Every day, there is some event happening in some part of the world, in India, in industry, etc. The larger section of the business media covers the daily events, which are meant for consumption by finance professionals. Since you don’t need to churn your portfolio every day, you need not pick up the daily events, which is referred to as ‘noise’.

How to apply?

You buy financial products such as mutual funds, equity shares, insurance policies, bonds, etc. All the products are regulated by regulators such as Sebi or Irdai. What you need to understand is the relevance for you, i.e., cut through the hype and see what are the basic USPs, how it fits into your scheme of things and what the comparable products are. To cite a few examples: (i) insurance is meant for risk cover, not for building investment portfolios (ii) equity shares of a leading company are more attractive when the price is low, not when the price is high or (iii) a mutual fund new fund offer on an investment theme or a close ended fund need not necessarily be more attractive than what is already on offer.

The retail investor section of business dailies will have a discussion on the products available, what the pros and cons are, and you have to pick from there what applies to you. It will be useful to see what were the similar products offered earlier and how they are performing. You need not project the returns from the product till date to estimate your future earnings as returns are influenced by current market conditions. At best, you may look at long-term historical performance of similar products to form a perspective.

To conclude, it is better to take inputs from a professional financial planner. If you are doing it yourself, you have to do at least the basic research and have clarity on why you are investing in the product.

By: Joydeep Sen

The writer is founder, wiseinvestor.in

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