SEBI must focus on `risk' education

S. Vaidya Nathan

THE analysis of the price performance of the bluechips, comprising the S&P CNX Nifty (all of which are incidentally part of the BSE Sensitive Index), clearly shows that a large proportion of stocks (close to 85 per cent of the 50 stocks) did not deliver returns which are comparable even with fixed-income options.

If one factors in the aspect that `equities' as an asset class carry the highest degree of risk and that within this universe, the risk profile of individual stocks could be even higher, the dismal returns for investors becomes striking. On the returns-risk scale, barring IT, pharma and FMCG stocks (with a few exceptions here too), stocks of most other sectors come off poorly.

Higher the risk, higher the reward is both an intuitively and an academically-appealing proposition and ought to hold good at a point in time and in the type of investments (for that matter any activity). But, on this front, for much of the 1990s, stocks of Indian companies have not delivered the goods for a long-term investor. Barring the IT and FMCG sectors, unless one entered the stocks at the right times and exited at opportunities of a similar nature, it would have been hard to make money.

If this is the case with top-line stocks, the picture down the line can only get murkier. Take this aspect along with the finding of a survey by the Securities and Exchange Board of India (SEBI) and the NCAER that the US-64 is perceived as the third least-risky option. The first two were bank deposits and gold. The US-64 is the flagship fund of the Unit Trust of India. The UTI with assets of around Rs. 20,100 crores and is still some way away from operating in a transparent manner.

Given the performance of stocks and the portfolio, and that of the US-64, this finding should have raised concern at SEBI. As the survey covered 25,000 households, this is not a finding that could dismissed out of hand. Clearly, the UTI name, the fact that the scheme has paid dividends year after year (though the yield comparison may place it in unfavourabe light) and the perception of safety stemming from the government backing for the UTI, seem to hold sway.

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The UTI may be inclined to see this positively, but SEBI ought not to and should have been alarmed by such a finding. There are no signs of this. If there was any firm evidence that risk did not play a major role in investment finding, SEBI now has it in its product -- the survey of investors. And this aspect needs to be looked at closely for a number of reasons.

Foremost is the misunderstanding of the US-64 itself. On a risk-return scale and in absolute yields, numerous other options have offered better returns. And if one goes back to the 1980s and the 1990s, the losses suffered by investors in different classes of assets have been due to one factor -- the ignorance of risk (this could also be alternatively looked as losses from investments driven by greed and by absence of informed investment decision making by many).

Be it the NBFCs/unincorporated finance entities of various hues, the collective investment schemes that offered everything from milk to holiday resorts, the primary market excesses and losses in ramped-up real-estate, the losses suffered by investors run into thousands of crores of rupees. Now the RBI and SEBI have regulations in place but these mean little as ``risk awareness'' seems to be at a premium.

The finding about the US-64 is a firm indication that as long as `risk' is not a major factor in the investment decision-making process, the bitter experiences of investors of all the aforementioned kind could be repeated time after time. This has tended to happen in the past in India as well as elsewhere.

But what SEBI can do is to take up this aspect in a high-profile manner as part of its investor education exercise. The importance of risk, its relationship with returns, comparison of risk-adjusted returns and the need to be well-informed about an investment option have to be integral part of such a campaign.

SEBI, no doubt, has improved the breadth of disclosures, but its quality still depends on the security issuer in question. There is a difference between breadth and quality and this is something that no amount of regulation can bridge. The difference has to come about gradually in the way investors look at information, and once it is clear that a relatively higher degree of transparency brings rewards for companies, the quality aspect could also improve.

This will take time and there will always be numerous issuers of dubious quality. It is only by highlighting the need to focus on risk that SEBI can ensure that the markets for various investment options are made relatively less risky. In the absence of concrete efforts in this regard, much of SEBI's efforts at capital market development may have only limited benefits for investors.

By making investors address the question of risk more than they do no, a few scams/frauds can be avoided (some may inevitably be a part of the system at any point in time). SEBI can also, over a period, make its job of surveillance and enforcement easier. This is because the investors themselves may bring a higher level of discipline at the investment stage itself than is the case now.