Why do we Indians prefer Fixed Deposit over Equities?

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Would you agree majority of Indians invest a larger portion in fixed deposit and guaranteed instrument in-spite of knowing the fact Equities have outperformed all the asset classes be it Gold, PPF, EPF and real estate, Why do we Indians prefer fixed deposit to equities, mutual funds for investments is a million dollar question

Let me explain you why do you do what you do…….

Imagine you want to buy a sofa set

You went to a furniture shop, you liked the sofa set and inquired the price

Price is Rs 35000/-

You thought “Why not look somewhere else for a discounted price?” (That’s what we Indians do and especially if your wife is with you, Well! my wife does that very often 🙂 )

You drove your car in jam packed traffic for another 15 minutes and found a furniture shop.

In this shop, you found the exact same sofa set with a price tag of Rs 35500/-

Would you go back to the previous shop to place an order or will buy from new shop?

I am sure you will buy from new furniture shop.

Why?

Because, going back to previous shop in a jam packed traffic for Rs 500/- doesn’t make sense, finally we are intelligent and rational human being.

Second scenario

Imagine you want to a buy a pen drive

You went to a mobile shop, you found the pen drive which you wanted with a price tag of Rs 1500/-

As usual you thought “Why not look somewhere else for a discounted price?”

You drove your car in jam packed traffic for another 15 minutes and found the same pen drive at Rs 2000/-

Would you go back to the previous shop to place an order or will buy from new shop?

Being a savings of Rs 500/- you will go back to the previous shop

So my question to you is, Why didn’t you went to the first furniture shop in sofa example. There was also a savings of Rs 500/-

You didn’t because you considered Rs 500/- against 35000, which has a low savings (weightage)

and

In pen drive example you considered Rs 500/- against Rs 2000/-, which has a high savings (weightage)

But you forgot one simple thing i.e Value of Rs 500 is Rs 500 in both the scenario.

If you are a logical, rational and intelligent human being, you should go back to first furniture shop and place the order.

Such kind of difference in treatment of money in different scenario is called mental accounting.

You create a mental map of money received to you or spend by you.

The same way when you receive money in form of salary you create a fixed deposit and money received by lottery, you spend lethargically.

Ultimately at the end of day, the X amount of money can purchase X amount worth of goods, not even a 1 rupee extra.

Just because of mental accounting, you try to take a personal loan at 12% or 13% interest and on other hand you keep a FD generating hardly 6–6.5% interest.

As a logical, rational human being it has to be netted off.

Let me give you a real example

One of my client had a personal loan of 8.5 Lakhs at 10.99% on EMI paying approx Rs 18500 per month whereas on other side a FD of Rs 10 Lakhs at a 6.5% interest generating a monthly income of Rs 5383

Initially he was not ready to clear the personal loan with fixed deposit money, after explaining mental accounting he agreed.

Final Equation: Rs 18500 – Rs 5833 = 13083/- positive cashflow in monthly budget.

Rs 13000 was invested in a mutual fund SIP for wealth creation.

Mental Accounting is the psychological reasons behind FD and traditional instruments

Lesson: Money is fungible, don’t treat your money from the source it is derived.

Whether it is your hard earned money or you won a lottery, use that money appropriately