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Need For Financial Education In India

There is a need to prepare for this future, certain to arrive, by creating awareness about financial education in India.

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Financial education leads to capital being allocated more efficiently which in turn makes societies prosperous. Employees in financial services are the brains of an economy and their decisions determine where capital is allocated. They always seek the highest possible returns on their capital.     

Investing using gut instincts may produce returns sporadically, but can never be part of a consistent investment strategy except when used to anticipate other parties’ actions. Investors who remain unswayed by sentiment while others succumb to them earn steadier returns. This axiom of sound investment is known to too few. Instead, investments are made using second-hand information and wishful thinking; the former may produce returns but produces asset bubbles while the latter results in losses. In a nutshell, this is how retail investors invest in Indian browsers. 

Alternative investments don't fall into the category of traditional investments. Unlike Indian retail investors that invest in the stock market, those who invest in alternative investments are extremely financially savvy. They have to be because only .01% of Indians have capital sufficient to invest in alternative investments. To put this in perspective, approximately 1.3 lakh Indians can invest in alternative investments if they so choose. A large number of certified professionals are required to help this affluent segment choose where to invest and to manage the capital invested. 

While compared to the population of India 1.3 lakh people is a miniscule number, in absolute terms it is a large number of affluent investors. The number of certified professionals who can deliver returns on capital invested in alternative investments will have to be in absolute terms, quite large as well. The need for such certified professionals will grow in the future quite simply because the number of the superrich in India is expected to continue growing for the next few decades.

Managing Alternative Investments

Globally there is more wealth than ever before. While it is increasingly concentrated in fewer hands, the number of those in absolute poverty has dropped considerably over the past decade. For instance, from 2004 to 2016, 281 million Indians rose out of poverty. Even more, rose out of poverty in China and other parts of the world during this period. The concentration of wealth in fewer hands is also creating wealth in the wider society. 

Capital chases high returns in order to create more capital which in turn grows an economy. Unless capital earns returns it succumbs to inflation, hence in a real sense, the superrich who can invest in alternative investments have little choice but to invest in them. 

Alternative investments produce returns exceeding that of the broader market with less downside risk.  Unlike throwing darts at a board as retail investors often do, wealthy investors who invest in alternative investments entrust their capital to skilled professionals who have a track record of producing returns. The need for such professionals will continue to grow this century.  

Who Will Manage Alternative Investments?

In India, the MBA degree is still prized, yet globally it is in decline and being replaced by a curriculum that is sharply focused. Global trends shaping the MBA have already arrived in India where even successful graduates of Tier 1 MBA programs always complete specializations that impart the deeper insights essential to manage alternative investments. Even among those who haven’t graduated from top tier colleges, the demand for specializations that grant expertise necessary to manage alternative investments is strong.

Gradually the investment landscape in India will mirror that in the west. Amateur investors throwing darts at a board and others with capital will have to turn to professional investment managers. The fact that capital not invested gradually succumbs to inflation, and the fact that most affluent individuals can themselves earn higher returns than traditional instruments offer, will lead many little choice but not to invest in alternative investments. 

Those who manage alternative investments today, and those who will in the years ahead, will be skilled in remaining resolute in the face of volatile market sentiment, a prerequisite to successful investing aligning fund managing practices in India with those in the west. They will be trained in hedge fund trading strategies, private equity investment, and will master the nuances of venture capital, distressed debt, real assets including real estate, infrastructure funds, intellectual property, commodity investing, and structured products that span the full range of derivative products. 

Gradually the investment landscape in India will shift to one less driven by animal spirits and more by cool rationality. The fact that nearly 85% Indians today are employed in the informal sector means as they become better integrated, over the next few decades, with the formal financial services sector, the domestic financial services sector will expand tremendously. It’s not implausible that many from the informal sector once they are integrated with the formal financial services sector go on to invest in alternative assets. Not only is it not implausible but extremely likely as many from such circumstances have already done so in the past. 

Finance will be the lifeblood fuelling the expansion of the Indian economy. It will create a number of success stories and will demand millions of individuals who are skilled in managing all asset classes, including alternative investments. There is a need to prepare for this future, certain to arrive, by creating awareness about financial education in India.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Nelson Lacey

The author is Director of Examinations at CAIA Associations - The Chartered Alternative Investment Analyst Association

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