Financial inclusion in the equities market

Addressing the inaugural session of the CII Mutual Fund Summit 2010 a couple of weeks ago, Sebi chairman, C B Bhave said that India was not yet ready for financial inclusion in the equities market.

Elaborating on the matter he is reported to have said, “We should first understand the term financial inclusion, as defined by RBI. It is different for banks and mutual funds. When we talk of banks, it means to include the poorest of the poor, but that can’t be the same for MFs. Financial inclusion is a noble goal and everyone should be working towards achieving it, but one should keep in mind the target customer. A person whose lifetime saving is a mere Rs 50,000 can’t afford to invest in MFs. If the market crashes tomorrow... he cannot take that kind of risk.”

It is unfortunate that, as some papers have reported, Bhave retracted the statement or diluted its radical significance in the interaction with the press later. It is even more unfortunate that both, the media and the MF industry thought it fit to ignore it altogether.

It is my conviction that financial inclusion in the equities market is both possible and desirable. But, let me clarify myself before I proceed to say why. I am making a clear difference between investment in equity and speculation in equity. Speculation in the stock market is definitely not for the poor, I fully agree with Bhave on that. But why not investment in equity?

Diversified equity funds, good and rotten put together, have returned 20% over the last 10 years; and the last 10 years have not been in anyway an uninterrupted bull run! So, why should a poor man not put his long-term savings in equity mutual funds?

If the market crashes tomorrow, the poor man will be devastated; I agree 100%. But, if the stock market can crash, so can the banks collapse and countries go bankrupt; as has happened in the recent past.  The 20% we spoke about above is after the markets crashed. The banks that floundered are still tottering; the countries are still on life support. The stock market has survived; because it is its nature to rise and fall with the tide. Banks and countries may take ages to revive, if at all they do.

So I see no reason why investment in equity should be taboo for the poor. In an uncertain world, excessive obsession with certainty is either a symptom of paranoia or evidence of hypocrisy.

The poor need to invest in equity much more than the rich; I do not mean much more equity; I mean they need it much more. The reason is very simple. If you need to reach a certain target amount in a given period of time, you have just two variables under your control: the sum you start with and the rate at which you grow it. If a poor farmer has a seven-year-old daughter and he needs to get her married at age 22, he has fifteen years to reach the magic figure of Rs 50,000. If he is to grow his savings in the bank at 7.5%, he needs to start with Rs 17,000; he does not have that sort of money.

The only option he has is to grow his savings faster. (Of course, other than not getting his daughter married!) If he grows his savings at 15% in an equity mutual fund, he needs to start with only Rs 6,000. 

That is dangerous piece of logic, you will say. Yes, it is; just as fire is dangerous in the hands of a fool; or water is dangerous for an ignorant. Still you would not think of depriving a poor man of fire and water.

The way out therefore is not to keep equity out of financial inclusion. In fact, I firmly believe that it is this mental block that equity investment is for the elite few, that has made the poor vulnerable to the dangers of equity. We have kept the vast masses of micro investors outside the main current of equity investment; we have no mechanism in place to let the savings of these small investors enter into equity investment for long horizons.

What is the minimum initial investment in a diversified equity fund? What is the minimum SIP size? The result is that if today a poor man invests in equity it is only lured by “get rich overnight” dreams woven by unscrupulous salesmen. Any surprise the consequences are devastating?

We have, by our own choice, made the poor play with fire; give him a stove and teach him to use it; financial inclusion in the equities market is both possible and desirable.

The writer has been working in the retail financial products space for 15 years, both in the industry as well as a visiting faculty in the subject at Goa University. He can be reached at tenala@gmail.com