Beyond savings: The case for informed investing

We all understand the importance of savings, and we have our own financial objectives. However, when it comes to investing, people may have differing views.

Some investors seek optimal returns by avoiding associated risks. Others invest merely as a formality and give less consideration to whether they are being adequately rewarded for the risks they take.

There are also people who remain confused about the concepts of Halal and Haram in financial investments and, as a result, prefer to save rather than invest.

At its core, investing is not simply about generating a return. It is about preserving and potentially increasing the purchasing power of wealth by taking an appropriate level of risk in line with the investor's risk appetite and financial objectives.

In my experience, many people prefer debt-based investments over equities because the principal appears more secure and the return is generally known or predetermined at regular intervals. Consequently, they tend to avoid becoming shareholders or participating in the growth and risks of businesses through equity investments.

There is a perception in the market that if a financial instrument offers a fixed return at periodic intervals, it must necessarily be Haram. This raises an interesting question: what about rental income? If someone purchases a property and rents it out, they may receive a predetermined amount at a predetermined interval. The fact that the rental income is fixed does not, by itself, make the underlying transaction impermissible. The nature and structure of the transaction matter.

Similarly, some argue that using KIBOR as a benchmark compromises the Shariah essence of an otherwise permissible transaction. But consider another example. Suppose we convince the owner of a wine shop to stop selling alcohol because it is Haram and harmful to society. He then changes his business and starts selling fresh fruit juice.

If he previously earned a 10% profit from selling wine and subsequently uses the same 10% profit margin for his fruit-juice business, does the fact that he used the same benchmark make the fruit-juice business Haram?

Clearly, the underlying transaction and its substance are equally important when assessing its permissibility. A benchmark is a reference point; it does not, by itself, determine whether the underlying business or transaction is permissible. Of course, the precise Shariah ruling depends on the structure and must be assessed by qualified Shariah scholars.

We often study investor behaviour, but I believe the behaviour and preferences of investment advisors deserve equal attention.

If an investment advisor is personally risk-averse and hesitant to invest in equities, there is a possibility that his or her personal constraints may influence the advice provided to clients. An advisor should therefore distinguish between the client's and the advisor's own respective risk appetites.

The responsibility of an investment advisor is not to eliminate risk altogether. It is to understand the client's objectives, financial position, investment horizon and risk tolerance, and then recommend an appropriate strategy, thus requiring extensive investment in training and development of resources.

In Pakistan, investors have access to a variety of investment avenues, including National Savings Certificates, Bank Deposits, Mutual Funds, Government Securities, Corporate Debt Instruments, Equities, Real Estate, Currencies and Commodities.

Ideally, an investor should design a portfolio by diversifying wealth across appropriate asset classes and securities. Diversification can help manage concentration risk and improve the probability of achieving long-term financial objectives.

The investment horizon should also be aligned with the investor's cash-flow requirements and the maturity profile of the portfolio. Someone who may need funds within a year should not necessarily invest the majority of those funds in assets designed for a much longer horizon.

The objective should be to take informed and calculated risk rather than simply avoiding risk.

There are several basic financial models and investment strategies that individuals can learn and apply according to their circumstances.

For example, dollar-cost averaging can help investors build positions systematically over time rather than attempting to perfectly time the market. Similarly, concepts such as the bond-floor approach and net present value calculations can help investors understand how different components of a portfolio contribute to their financial objectives.

The important point is that one should not be afraid of investing simply because it appears complicated.

One should be open to learning through asking questions, consulting qualified experts, understanding the risks and gradually stepping out of one's comfort zone.

There is another important misconception: if someone has debt, they assume that they are no longer in a position to save or invest.

This is not necessarily true. Consider someone living in a rented house and paying PKR 75,000 per month in rent. If that person approaches a bank for mortgage financing, they would prefer to keep their monthly instalment lower than PKR 75,000.

Interestingly, we often treat a mortgage as a long-term financial commitment but hesitate to commit to an investment plan for even three years.

The difference is partly psychological. We tend to think of loan payments as an unavoidable expenditure while viewing investments as something that can be postponed.

Financial planning requires us to look at both sides of the balance sheet: our liabilities and our assets.

If we look at financial education in many developed markets, basic concepts of saving, investing, risk, diversification and financial planning are introduced at a relatively early stage.

In Pakistan, we still have significant room to improve financial literacy. We have a professional investment-management industry. Asset Management Companies employ investment professionals whose core responsibility is to manage investors' wealth according to defined investment mandates and objectives. The industry manages substantial amounts of investors' money across different asset classes.

Therefore, if we have wealth but lack the necessary expertise, we should consider consulting qualified professionals rather than experimenting with our hard-earned money without sufficient knowledge.

Professional advice does not mean blindly following someone else's recommendation. It means asking the right questions, understanding the risks, evaluating alternatives and making an informed decision.

Saving is the foundation of financial discipline, but saving alone may not be enough to preserve wealth over the long term.

Inflation continuously eats away at purchasing power. Therefore, the broader objective should be to develop a financial plan that combines adequate liquidity, appropriate savings, prudent debt management, diversification and investments that are consistent with our objectives, risk appetite and, where relevant, our Shariah compliance.

Investing is not about chasing the highest return. It is also about understanding the relationship between risk, return, time and liquidity and making informed decisions accordingly.

The purpose of this article is not to recommend any particular investment product or strategy. Rather, it is to share some observations from my experience and encourage potential investors to think beyond savings, educate themselves, seek qualified advice and make well-informed decisions about their hard-earned wealth.

We should not simply ask, "Where can I keep my money?" but rather ask, "How can I manage my wealth efficiently so that it continues to serve my financial objectives in the future?"

The writer is Head of Institutional Sales, Business Strategy and SMA at ABL Asset Management Company Limited.