A prudent investor while making investment decision need to keep in mind importance of return, liquidity and safety of instrument as per his/her risk appetite, preferences and needs. The decision making process of financial investment revolves around return, liquidity and safety of financial instrument. The returns in form of interest, dividend and capital appreciation remain most important factor in this process.
Liquidity is ease of timely and with no or least cost receiving back the invested principal amount and interest accrued. Further, safety refers to the chances of default on repayment of principal amount invested and or accrued interest at the time of maturity or call of redemption.
There are many instruments which provide high returns however lack in providing sufficient level of liquidity and safety. While choosing an instrument for investment one has to make a balance between these depending upon the risk appetite, preferences and needs.
The global business was showing signs of downturn during FY-2020 and after outbreak of COVID-19, with a view to put a check on further slow down leading to recession, central banks of various countries announced extraordinary monetary policy measures including reduction in interest rates.
In India too, with a view to reversing the slowdown in growth momentum as key rational, the monetary policy was already in an accommodative mode and repo rate was reduced by 135 basis points between February 2019 and the onset of the pandemic. Further, given the uncertainty regarding evolution of Covid curve, Monetary Policy Committee (MPC) of RBI decided to cumulatively cut the policy repo rate by another 115 basis points over its two meetings, resulting into total policy rate reduction of 250 basis points (100 basis points means 1%) since February 2019.
There is a direct relation between policy repo rate decided by MPC and announced by RBI and rate of interest on deposits and advances of banks and other financial institutions. Leaving aside the economic rational and benefits of resultant reduction in rate of interest charged by banks on advances, the reduction in interest rates of deposits has adversely impacted the matrix of returns, liquidity and safety.
At present rate of interest on bank deposits has moved to negative trajectory as rate of inflation is higher than rate of interest on bank deposits. There are many adverse effects of this phenomenon and better understanding of these would be when we view other alternative avenues available in the light of return, liquidity and safety matrix.
The most common instrument is bank deposit in shape of demand deposit (savings) and time deposits (RD and Fixed). The rate of interests on fixed deposits has been brought down in the range 150 to 175 basis points across banks (PSBs, PvBs, RRBs, and SFBs). At present, deposit with a bank is insured upto Rs. 5 lakh for both principal and interest amount held in the same right and same capacity (Joint deposit account of “A & B” and “B & A” to be taken as separate accounts) by DICGC. There is no issue of liquidity means all fixed deposit (except non-callable) can be withdrawn fully or partly (by taking over draft facility) before maturity. Further By virtue of these, in spite of reductions in rate of interest deposits in a bank provide a good balance between return, liquidity and safety.
After deposits with banks, an investor has another option to keep deposit in small saving schemes of post offices like RD, FD, Monthly Income Scheme (MIS), Kisan Vikas Patra (KVP), National Saving Certificates (NSC), Public Provident Fund (PPF), Senior Citizens Savings Scheme (only for senior citizens) and Sukanya Samridhi Account (only for girl child below age of 10). The option of investing in last three schemes is also available with designated bank branches.
The advantage of investing in schemes of post offices is Sovereign guarantee by Central Government. However, there are lock in period for withdrawal reducing liquidity in many schemes besides problem of servicing. For investors looking for higher returns with safety and ready to sacrifice liquidity deposit schemes of post offices work well.
The Fixed Deposits of high rated corporate like HDFC, LIC Housing Finance, PNB Housing Finance, Bajaj Finance, Mahindra Finance etc are also available for investments. These instruments also offer better rate of interest but problem of services, liquidity and safety remained challenging factors.
Further, there are pension plans like New Pension Scheme (NPS) and various other pension – insurance schemes of various insurers. NPS is administered by PFRDA and insurance companies are regulated by IRDA. These schemes are useful for those investors who would like to build a regular post retirement income base.
These all are money market instruments and besides these one can also invest in capital market instruments like buying of equity share of a listed company either directly investing through NSE/BSE approved broker or SEBI approved Online Platform. Another way to invest in capital market is buying units of Mutual Fund and investing in Systematic Investment Plan (SIP). In falling rate of interest regime there is tendency to shift from traditional investment (FDRs) to equity market.
During current FY21 there has been huge surge in opening of Demat accounts not only in India but all over world. Here lies a chance of being trapped in complex behavior of stock market. New entrant being novice having limited information is likely to take a decision which may disturb the return, liquidity and safety matrix.Disclaimer: Opinion/facts in this article are author's own and famepunjabi.in does not assume any responsibility or liability for the same.