With commercial banks increasing their fixed deposit (FD) rates to double digits, a lot of citizens are moving towards this investment vehicle. And why not? The alternatives today are not confidence inspiring — markets have fallen by 15% in the past six months, gold and silver have moved into bubble territory, and land has taken its 20-35% leap over the past year.
On the other side, inflation is eating into the purchasing power of money, pushing Reserve Bank of India (RBI) to increase India's policy rates nine times in 13 months, the last one being a 50-basis-point increase in the repo rate (rate at which RBI lends to commercial banks) to 7.25% last Tuesday.
That effort seems to be in vain, however — all that RBI and the government have been able to transmit are promises of lower inflation, but no real action. As a result, while borrowers are feeling the pinch of higher rates on their home loans, lenders are gradually rediscovering an old investment flame: fixed deposits (FDs). At more than 10%, FDs could give senior citizens the higher returns they're seeking at virtually zero risk. In the short term, say, for the next three years or so, that is probably a good idea.
But in the longer term — and many senior citizens in their early 70s will live well into their 90s — fixed deposits may not be quite the place to park all that money. To protect their money from inflation, they must keep 25% or more in equities. For the young, it should be 75% and more.
An economy that grows at a 'slower' rate of 8% that makes India the world's second-fastest growing economy after China means the earnings of the underlying organised sector companies that are listed will, on an average, grow by 20% or more. To miss this biggest-ever ride of Indian equities would be an investment error. The trouble is that investors confuse getting an 'equity exposure' with 'buying stocks'. The latter is best left to experts, brokers, fund managers. But as far as equity exposure is concerned, India today has the world's cheapest product — mutual funds — that investors must buy into.
At an annual cost of less than 2% or less, you can get access to some of the best-performing mutual funds that deliver 20-50% returns every year. But unlike FDs, these returns are not consistent — they may fall in some bad years, could double or treble in very good years. But at the end of 20 years, you can expect a return of 15-20% — meaning you can multiply your money 30-fold.
From the noises I am hearing in newspapers through select leaks, however, it looks as if Securities and Exchange Board of India (Sebi) under its new chairman UK Sinha is planning to reintroduce 'loads' — the price that an investor must pay while buying into an equity fund. Knowing the investor-friendly DNA of Sinha, I don't think he will succumb to the pressure of distributors to fatten their bottomlines.
Load was a burden previous Sebi chairman CB Bhave had ended, making mutual funds even better for investors. Following this, the equity assets of the industry fell by a statistically-insignificant 2%.
In fact, over the past 12 months, a new wave of investors, armed with systematic investment plans(a small amount, say R5,000 every month) have invested in mutual funds with a never-befre-seen enthusiasm. It is this set of investors that Sebi needs to keep in mind and serve as its primary constituency.
Globally, this is where the markets are moving — UK plans to end entry loads on all financial products by 2012; other countries are going to follow. At a speech to financial planners from 23 countries I made last year in Taipei , I argued for two points. One, the world must learn from India and end all entry loads on financial products. And two, while financial planners must charge for the advice they give, they must be regulated. Instead of reintroducing loads, Sinha would do well to work towards regulating advisors.