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Pain reduction or Joy Enhancement

Posted By: Admin

The Banking industry funds account for excess of Rs 2,00,000 Crores, while the Mutual Fund industry is worth Rs 30,000 Crores ( Approximate values as on 31st May 2021). 

This despite the fact that the average returns in Fixed deposit before taxation has been say 8% ( over the past 20 years) and the average returns in Equity Mutual Funds over the past 20 years have been upwards of 15%pa. 

It would seem uncanny that an asset that is yielding you a lesser return is sought out more than an asset that yields you more returns. This comes from a human condition that can be attributed to  Loss aversion. 

Every human endeavour can ultimately be classified as one of two, Pain reduction or Joy enhancement. Initially we eat food to stave off hunger, we are then in the pain reduction mode, as we become more prosperous that stops being the motivation and we move to the joy enhancement we want to eat of certain types of food. We want to eat at a certain fine dining restaurant etc.. It is no longer about satisfying hunger, but it involves a certain taste. 

However it is evident that between the two emotions, Pain reduction is primary and joy enhancement is only secondary. Given an option, we would first like to ensure pain reduction before we figure out a way for joy enhancement.

Investing in a Bank Fixed deposit while generating very low returns is a pain reduction investment, it is safe and does not throw surprises at your. At Least not the way equity mutual funds would do. 

On the other hand, Investing in Equity Mutual Funds is for joy enhancement, the return one hopes to make is fairly high , almost double of the bank FD rate, however it is fraught with risks and sometimes the principal amount itself is eroded leave alone the return on that. 

Those who seek to create long term wealth must seek to understand this fundamental difference. If pain reduction is your fundamental emotion, then fixed deposit is your go to investment, you should not aspire for Equity investments as the volatile equity prices could give you sleepless nights and worry you to no end. 

On the other hand if Joy enhancement is your predominant emotion, then you would feel that your money is wasted by parking in Bank Fixed Deposits. You would believe except for some emergency needs all your money would be parked in Equity Mutual Funds generating superior returns albeit taking a higher risk that you are comfortable with. 

Since pain reduction is the first  emotion of the human being and a significant population of Indians have yet to overcome that to reach joy enhancement, you would find that the banks hold more money than Mutual Funds. 

However, over the next two decades as significantly more people realize that  they want to travel beyond pain reduction into Joy enhancement, you will see that this ratio of 200:30 ( bank deposits : Mutual funds) would stand reversed. The MF industry would be 6 times the size of the banking industry. 

If you are already on joy enhancement mode, your future looks really bright, so irrespective of the crashes / corrections that happen in Equity markets hold faith and in the long term you could  be laughing all the way to the bank. 

So what’s  your predominant emotion: Pain Reduction or Joy enhancement ?  

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