Importance of women in family investment decisions

There has been a dramatic social change in India and across the world with respect to life of women over the last two decades. With this transformation being under way, urban women, especially, often are required to juggle between their career and household responsibilities. Women are also increasingly playing a larger role in making important family decisions, thanks to the improved education, healthcare, increased exposure through media and internet and change in family structure.

Why women need to play an active role in investment decisions

Many a time, we come across views that women are temperamentally more patient and prudent when it comes to managing household finances as compared to men. Various studies have shown women to be better at multitasking than men. While these can be debated, it is broadly accepted that men and women don't think alike. This is actually a great situation for decision making, including investment decisions.

Consider this: In a family in which all decisions are taken by the man, there are high chances that they could be more emotions-driven and biased as compared to relatively high level of objectivity that could be achieved when two brains are involved.

Even in case of investments, the concept of efficient portfolio theory states that a mix of an uncorrelated assets lead to a more stable return. Low correlation in assets makes them behave differently during a given period of time. For instance, the performance of equities and debt has relatively lower correlation and a portfolio with a mix of equities and debt is likely to be more stable than a 100 per cent equity portfolio. Similarly, a decision making process that involves two differently thinking people is likely to produce superior results over a period of time. Since investment decisions can have ramifications spanning over decades or generations, it is highly important for both the spouses to understand and agree upon choices to be made.

Another reason why women need to be active in financial decisions in a family is to be prepared in the advent of any contingency like death of/separation from the spouse. It is highly important for a woman to be aware of these possibilities and the financial implications thereof. For starters, we have outlined a few aspects in relation to saving for the future.

Importance of asset allocation—a balanced diet

Just as women are experts in providing a balanced diet to their family members, a parallel can be drawn here with reference to investments too. This brings up one of the most important aspects of investments —to allocate savings into different “options available” or “asset classes”. The idea of asset allocation is simple that it is a process of spreading one’s investments into different asset classes like equities, debt, gold, real estate, etc for long-term wealth creation, while managing the risks as much as possible.

Broadly, one can classify various asset classes according to three factors—expected returns, risks involved and liquidity or the ease with which one can exit the investment. Generally speaking, returns and risks go hand in hand. In other words, higher the risks, greater will be the chances of earning higher returns. For instance, equities or stocks can be risky in the short term, while they have the potential to deliver higher returns than most asset classes in the long run. In contrast, debt investments do not undergo volatility like equities, but the return potential is limited. Hence, one needs to optimise the risk and returns by taking into consideration the risk tolerance, time horizon and most importantly, the financial goals. Risk tolerance is primarily a function of the age of the investor. The younger you are, higher is your risk taking capability due to the fact that there is more time left till you retire and can better recover from any short term financial mishaps.

Return expectations from various asset classes are also different. For instance, an investment of Rs 1 lakh for 30 years would grow to over Rs 10 lakh at 8 per cent compounding, which is approximately the returns expected from risk free investments, like a bank FD. On the other hand, at 15 per cent compounding, the investment of Rs 1 lakh would grow to a staggering amount of over Rs 66 lakh in 30 years. If you look at the historical returns of equities, the S&P BSE SENSEX has compounded at nearly 14 per cent over the past 30 years. Hence, the expected returns out of equities are higher as compared to that of debt investments.

Hire an investment expert—your trusted partner

We often take advise from the most trusted professional, whether a doctor, a lawyer, a CA, etc. Investment planning is a serious subject and one should not take things in her own hands. While the valued advice of an investment expert comes at a cost, it is often negligible when compared to the potential benefits and the costly investment mistakes one may make. As investments encompasses making the asset allocation decisions, evaluating various investment options available, assess the impact of taxes, taking care of emergency fund requirements and closely follow macro-economic developments that may impact the portfolio, it would be wise to engage with an investment professional. Moreover, an investment adviser would help an investor stay firm on course tiding over short-term market ups and downs and not bowing down or giving in emotions while making investment decisions.

Rationalise large spending vs saving for future

There is often a debate in families with regard to the priority of expenses. Children want to have fun and spend whereas the parents want to save for the future. What we need to successfully achieve is a harmony between the two. How should one go about saving money?

First, a family needs to have financial goals in mind and both husband and wife need to be on the same page regarding that. For instance, the priorities need to be spelt out as to where to spend and where not, when it comes to aspirational needs. An example of disconnect between the spouses in terms of aspirational needs could be the wife thinking of a foreign vacation and the husband dreaming of a buying a car ahead of receiving yearly bonus. One needs to rationalise between such spending vs saving for the future. Lack of clarity as to aspirational needs and financial goals is a recipe for disaster.

Invest with a goal

Having a goal associated while making an investment brings in an inherent discipline to stay invested for a long time and not giving in to the temptation of overspending. In the Indian context, two major goal-oriented themes that have emerged over the years in the mutual fund industry have been savings towards retirement needs and children’s education/marriage expenses. Most people underestimate the need to save towards retirement saying it is a distant event that one can prepare for later. One needs to remember that retirement is inevitable and at some point when the income stops, it important to be financially prepared for the same. Similarly, the rising cost of education is known to all, and it is important to build a separate corpus towards one’s children’s needs as they grow up.

It is important to start early and invest regularly towards the stated financial goals. Systematic investment plans offered by mutual funds are a great way to save in a disciplined fashion as a particular amount of money gets debited from the bank account automatically and gets invested.

To conclude, all we need to drive is the fact that you are an important member in the family. You should not stay happy confined to television soaps, kitty-parties and rearing up children. You need to participate in all financial decisions. This is good for your own self-esteem as well as the way your family would respect you for your contribution.

—The author is senior vice president & head—products & marketing, HDFC Asset Management 

(The opinions expressed in this article are those of the author alone and not of THE WEEK or HDFC AMC, and should not be regarded as investment advice. Investors should obtain their own independent advice before taking a decision to invest in any securities)