According to a local research, Pakistanis have a relatively short-term perspective when it comes to investing. Most people consider 5 years to be the maximum time duration they can think of investing, while majority would be comfortable over a 3-year investment period.
The uncertain economic and political environment of our country, now and over the past few years has probably lead to this ‘short-term’ mindset. The uncertainty of what the future holds affects our investment psyche and we are not ready to commit our savings for longer-term investments.
On the flipside, in countries like the United States of America and United Kingdom, people are more receptive to longer-term investments and consider a 10- to 20-year period when planning for their long-term goals. They are also more systematic and organized about their investments, planning according to their ‘life stage’. They start saving for college education from the day their child is born, open a retirement savings fund from the time they start working, and fit other goals such as ‘vacations’ and ‘house renovations’ at different stages of their life.
Having a systematic approach to investing has many merits. Possibly the most important is the sense of security and certainty it will add to your life. Even when you are confronted with uncertain circumstances, having started early will make sure your goals are still on track.
Starting early also makes the process of investing easy. We all know a good college education is the stepping stone for our children’s future. We also know that a good college degree is not cheap. Now you can either start saving a small amount regularly from the time your child is born, comfortably building your savings over the next 18 years, or forget all about it until your child is three years away from starting college, and find yourself frantically trying to make ends meet and cutting a few corners here and there.
Another unique characteristic of the Pakistani investor is that regardless of the short-term view to investing, he is not willing to compromise on the return on investment. According to Fahad, a 28-year-old business executive, an ideal investment should be 3 years long and yield an annual return of 16%.
The fact is that traditional investment avenues such as savings schemes offered by banks and the government, are not designed for long-term growth of savings. Even if you were to invest in such schemes with a long-term goal in mind, the return potential on your investment would be limited.
As shown in the chart above, National Savings Schemes (NSS) have given an average annual return of around 12% over the last 10 years. A stock market investment (KSE), in comparison, gave an average annualized return of approximately 23%. This includes the 2008 period when the stock market witnessed a huge dip.
But despite being a promising long-term option, stock market investments are not very common amongst the larger majority of our population. Even urban investors shy away from stock market investments, owing largely to what is known as the ‘fear of the unknown’.
Beating the ‘Fear Factor’
We live in a ‘Loss Averse’ world and that’s globally a psychological fact. The psychological effect is perceived to be twice as strong as that of a gain which is primarily why people prefer safer options wherever available. But in actuality, the fear of stock markets arises not out of chances of losses but because of unfamiliarity with the turf; not knowing what to buy, when to buy and when to sell.
World over, stock market investments have given higher returns compared to all other forms of investments in the long term. Stock-based mutual fund investment schemes are the common man’s solution to investing in the stock market. When investing in a stock-based mutual fund scheme you delegate the responsibility of managing your investments in the stock market to professional fund managers. They have the necessary experience, know-how and resources to manage your portfolio. They make the stock selection, buying and selling decision on your behalf based on sound research and market fundamentals.
If you are wondering how much investment you would have to commit to benefit from these services, the answer is ‘not too much’. Some Fund Management Companies will allow you to open an account in a stock-based mutual fund with as little as Rs. 500 every month.
While you may have the capacity to invest more, starting with a small amount initially can be a great way to test the waters. After familiarizing yourself with the workings of a stock-based investment, you can decide if you wish to invest more or continue to make smaller investments on a regular basis.