While security of funds is important, term deposits don’t really help tap the full potential of your savings. Instead, a few calculated risks can help you double your wealth.
The lives of Narasimhan P. and Prakrit Kant, middle-level executives in a multinational firm, had much in common. Both in their late thirties were well educated, happily married, had two children and represented the increasing number of aspiring nuclear families. They cherished their similarities and their friendship. Until, Prakrit told his buddy that he had finalised an apartment in an upcoming project on OMR.
It was on the seventeenth floor with its balconies overlooking the scenic backwaters and opening to wafts of fresh breeze. The cost, a good Rs.80 lakhs! He planned to meet the cost with a home loan of Rs.45 lakhs and dig into his savings to pay the remaining Rs.35 lakhs.
Narasimhan, whose savings totaled around Rs.20 lakhs, was puzzled. How had his friend managed to save so much? “I am not a risk averse investor like you Simha,” said Prakrit, “While you opted for the safe banks deposits and post office schemes, I invested in stocks, mutual funds and even gold.” Those who believe in the ‘better safe than sorry’ idiom will invariably end up feeling sorry in the present times of soaring inflation.
He is among the number of salaried class investors today for whom security of the investments is not the factor driving their choice. They are willing to take greater risks to make their investments generate wealth.
Safety vs. Risk
Before proceeding further, let’s get one thing clear: investment in savings account, bank term/fixed deposits and postal savings offer a high level of security. They guarantee peace of mind. The return on them, however, is under seven percent. The humble savings bank account perhaps pays the least - 3.5 percent.
Fixed or term deposits with banks are equally secure. The interest varies depending on the bank and tenure. Unlike the SB account, the interest on deposits changes more frequently. But that does not mean that you stand to gain with every increase or conversely, lose with a reduction in the interest. In a term deposit, you park a specific amount with the bank, at a pre-fixed rate of return for a set tenure.
The money in a term deposit is inaccessible until the tenure gets over. There is also tax- saving deposits with a lock-in period of five years and above. These instruments are for those who do not bother about liquidity, are content with a fixed rate of return and willing to let their money remain idle for a specific time.
Corporate entities also solicit fixed deposits. They pay slightly more interest, allow access to the principal after some time and on such investments you get tax breaks. But deposits with banks are more secure.
Only other instrument that offers enhanced security and tax benefits are the postal saving schemes. The lock-in period, however, is an irritant. In the event of an emergency, you cannot bank on the money. Then, there is also a tax on the interest you earn, if it exceeds a limit set by the government.
Eye on the future
Financial consultant Raghuvir Yadav says every investment option has its own plusses and minuses. It is for the individual to decide which is best suited for him/her. But if you are investing to meet long term financial goals such as buying a house, education and marriage of children or retirement needs, then parking your money in a bank is not the best thing to do.
Salaries, incentives and retirement benefits are not enough to fund the goals. Well thought of investments will see you through. Real estate is also one area where the returns have exceeded expectations. But most of those who have made a windfall in real estate are those who purchased the property years ago.
Stocks more lucrative
Apart from stocks, the other investments where you stand to gain more are mutual funds, ULIPs (Unit-Linked Insurance Policies) and gold.
Analysis shows that the stock markets, as compared to conventional avenues of investments, have proved to be lucrative. Over a long term, they return inflation-beating results.
Investors, who went with equities rather than gold in the last five years, generated a 12-percentage-point higher return compared to the eight-percentage-point plus return in the mid-1990s. The equity returns are much higher than the returns on investments in bank fixed deposits too. Interest rates on fixed deposits have fallen sharply since the mid-to-late nineties.
For those who find the stock market a risky proposition, there are mutual funds and ULIPs offering higher yields.
Money generates money
What better way to do this than invest in equity mutual funds and ULIPs. These are instruments that offer a better rate of compounding for your capital than cash lying idle in the bank. You stand a better chance of creating wealth in the long run.
Until the new direct tax code is implemented you pay zero taxes on such gains if you hold these instruments for the long-term. Equity linked savings scheme (ELSS mutual fund) may turn out to be an even more tax efficient investment than a regular mutual fund.
ULIPs combine the safety of insurance protection with wealth creation opportunities. A part of the investment made in the policies goes towards providing life cover and the rest gets invested in a fund which in turn makes investments on stocks or bonds.
The value of investments alters with the performance of the underlying fund opted by you. ULIPs are structured such that the protection element and the savings element can be distinguished and hence managed according to your specific needs. They offer unprecedented flexibility and transparency, says a website of ICICI Prudential on ULIPs.
Gold remains one of the best choices for hedging against inflation. But then investment in gold should be significant and not merely in some pieces of jewellery. All of us know how the jewellers adopt their own methods of arriving at the value of old gold. Investment in yellow metal is most rewarding when in the form of gold biscuits or coins.
In the last two years, for instance, when inflation soared beyond 10 percent, gold yielded a 15 percent return. The yellow metal has caught the investors’ fancy only in the last seven years as purchasing gold as an investment is something relatively new in our country.
Time to change
Narasimhan realised putting your money in a savings bank account or a term deposit is almost akin to sitting idle. Analysts say that India is going through an inflection and the equity capital markets will be the best avenue for long-term investment and a good way to build an alternate and legitimate source of wealth.
If you believe in India’s economic growth story, then move at least some of your money from your bank account to a higher yielding investment to give yourself a fair chance to create long-term wealth. Make your money create wealth.