Investment is a mindset

Lack of awareness hindering Pakistanis from taking better decisions

KARACHI: Investment is not an exercise, but a mindset. More often than not, it is the lack of awareness that gets in the way of making smart choices and reaping benefits.

According to a 2009 World Bank report, only around 14% of Pakistanis use financial products from a formal financial institution. Given the relatively low penetration of financial inclusion, it’s not surprising that Pakistan’s ratio of gross domestic savings as a percentage of GDP stands at a mere 8%.

The ratio determines the country’s future path and Pakistan’s low formal banking participation and meagre savings rate are indicative of a larger issue – lack of depth and breadth within the country’s capital markets.

Sri Lanka, which has a population of 20 million, boasts around 550,000 investors. Pakistan, in comparison, has a population of 200 million, but 250,000 accounts. Needless to say, there is a huge gap that is left untapped.

Robust and healthy capital markets are not only a key indicator of economic activity, but an important signifier of human and social development.

They symbolise strategic thinking, the ability to plan one’s future and delay short-term gratification for long-term benefits.

All this begs the question — what are the hurdles to ‘investment’ in Pakistan.

Lack of relevant knowledge about capital markets would take the top seat. When the average Pakistani thinks of ‘investing’ (especially within the equity markets), they are often assailed with financial jargon and terminology that can be overwhelming. Add to this the paranoia around the stock market and it is least surprising that capital markets seemingly remain out of reach.

The irony is that individuals ‘invest’ in themselves all the time, whether it’s value-addition through education or something as simple as buying a motorcycle.

But how does one go from making every day, casual investment decisions to developing it as a mindset?

The prerequisites for investing are as straightforward as any rational decision: the collection of facts, patience and perseverance. Ultimately, there are three pertinent factors at play: cost, rewards/savings, and risk.

The very first step is to understand that there are no barriers to entry – anyone can invest in the capital markets. And there is no limit – upside or downside – on how much or how little one wishes to invest. The next step is understanding your limitations and setting a goal – why am I investing?

This step is essential as it will define and inform the rest of your investment strategy. For example, pensioners will focus primarily on income. Conversely, fresh graduates may be aiming to save for retirement or a lavish trip, while an individual who wants to start a business might be thinking of saving for future development.

Once the goal has been identified, it is crucial to understand the factors that could hinder their investment objectives. An example of such ‘risks’ is that of a person saving to set up a business in five years time.

This individual puts 10 percent of their salary into a savings account in the hope that this will suffice for their future start-up. However, the risk here is that it is highly unlikely that the individual will accumulate enough funds to achieve his goal.

This is where the role of a financial advisor comes into play.

The most important thing is patience – investing is a long-term game and is not for those looking to make a quick overnight buck. In fact, there is a marked difference between ‘investing’ and ‘trading’. You can’t treat investing as an ATM machine – rather think of it with a long-term horizon and develop a degree of consistency.

Pakistan’s capital markets remain nascent and as such, the economy has not yet reaped the full benefits of investment.

In order to rectify the negative connotations associated with investment in Pakistan, a two pronged strategy is needed: firstly, the media needs to project a positive and reassuring image of the implications of investment. Secondly, initiatives need to be taken by relevant bodies for maximum effectiveness.

For example, India established an organisation that has conducted over a 1,000 seminars to raise financial literacy. We simply need to take small and consistent steps to reach the finish line.

The writer is the Managing Partner at Abbasi Securities

Published in The Express Tribune, November 8^th, 2015.

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