Trust factor in Indians’ savings patterns
How do Indians choose the type of assets which they use for their savings and investments? Ideally, the answer should be based on factors like suitability for one’s financial goals, returns, liquidity, risk level etc. However, that’s the theory. In practice, while such factors do play a role, there’s another factor that is very important for most of us. This factor is trust, or rather, mistrust.
Many of us avoid putting our money into certain avenues because we mistrust them. Often this is not an evaluation of the actual risks that the asset class has, but because those selling it are not perceived to be trustworthy. Stocks are the archetypal example. Savers get interested in stocks, take advice from a broker, start trading in stocks, burn their fingers, decide that the advice was bad and never invest in equities again. Once they get into this attitude of mistrust, they transfer it to all forms of equity investing.
In recent years, the big new areas of mistrust that have appeared are real estate and insurance. Real estate developers have broken the trust of their customers on such a huge scale that it’s now a major factor in shaping people’s idea of buying an apartment. Instead of starting with a location or a budget, most homebuyers start by hunting for a developer who has a track record of never running off with customers’ money. This puts a huge premium on completed projects.
In insurance, the huge ULIP ripoff has scared off a large class of customers who need to buy real (term) insurance, specially because the sales force will rather drop a buyer than sell term insurance that he needs.
Each one of these areas of mistrust indicates a failure of the regulatory institutions. Unfortunately, one is able to see too much hope of an urgent correction.