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How are you all? Hope you all are doing well!
Whenever the topic for discussion is centered on investments in our society, not the majority but more than half of them stick to safe investing instruments, more often they stand with Fixed Deposits (FD). The only reason behind their choice is the safety of the invested amount in FD’s.
Well, there is no doubt that FD’s offers the best security to your invested amount but what about the interest rate it offers? People, who prefer FD’s, do only the safety of their investments matter to them? Do their objective to invest is to keep their money safe or they want their money to grow in authenticity?
The evaporating returns from safe investments like FD’s, raise the matter that one should still stay invested in this new (to India) low interest-rate world or now it’s the time to get their strategy changed!!
History Of Lowering Down Of Interest Rates Offered By FD’s!
Last year that is the pandemic year 2020, proved to be not so good for the finances. This was the reason that the interest rates were, again and again, cut down by the RBI (Reserve Bank Of India). However, it's also a fact that FD’s have been lowering their interest rate before this pandemic year too.
Let us have a look at the history of Interest rates offered by FD’s:
Earlier than 2016, interest rates offered by FD’s was around 9%. However, the inflation rate at that time was around 10-11%, thus FD’s offering this much high returns was also not taken as a good investment. This was because the interest rate offered by FD’s was lower than the inflation, which means eventually the inflation was going to eat up all your investments.
Then in January 2016, the interest rate offered by FD’s slide down to 5.5%, but still it was good as the rate of inflation crawled down to 4% or something like that. In that situation, people investing in FD’s were earning a kind of interest from their investment, although it was very less.
If we talk about the current time, the interest rate offered by FD’s is around 5%, and the inflation is also trending around 5% or higher. Both are somehow equal, but this is not a matter to relax. In fact, we need to rethink before investing in FD’s. We need to analyses how FD’s have changed in these years? How have we gone from having the interest rates working in the right direction, to suddenly things not being so happy anymore?
What Are The Issues Faced By The FD’s?
Well, this is not only an issue in India. In fact, FD’s or safe investments are facing this downfall all over the world, and their problems have worsened due to the pandemic last year. FD’s has been facing this downfall all over the world, and the central banks of the day have changed their track. They’ve actually gone down to the level of saying, ‘we don’t think that you can get a lot of money from relatively low-risk instruments. So, you give the government money, which is the safest form of investing your money, by buying a government bond. But we are going to make that as unattractive as possible”.
The prominent reason behind this consideration is the volatility that the pandemic has brought in 2020. The issue is that there’s not enough risk-taking and everybody’s cowering in fear, and they want to go to the least risk asset possible. So worldwide, the central banks and the governments, together, have decided that they want to give you as low-risk, low-incentive to be risk-free as possible.
In India, a similar strategy is being followed by RBI. They have acted all like a hawk, Earlier they said, “Listen, we’re afraid of inflation. We’re afraid of prices going up” but now they have changed their dialogue as per the situation. What they are saying now is, “Listen, whatever happens, prices may go up a little bit. I don’t care. I will try to build growth because growth is suffering and suffering a lot because of what is happening with COVID and other reasons. So, I would rather keep interest rates and prices low”.
RBI has cut down the interest rate further to 3.5-4%. This bank has expressed their issues and said, “we’ve cut our rate, we don’t really want your money, we don’t have any great avenues to deploy them at higher rates. So, we’ll reduce our deposit rates and reduce the FD rates”.
FD’s To Generate Cash But Not As Investments
Experts say that with the decrease in interest rates offered by FD’s, it must no longer be taken as investments, however, it can be used to generate cash. Well, for the latter purpose, there are other ways out also, that is still looking much more beneficial than FD’s.
Experts say people generally focus on investing their money instead of saving so that they can earn interest. So, they want their money to pay us a salary every month in a way that salary should just take care of the expenses that they have. This is somehow looking to be impossible with FD’s.
There are better avenues as safe or perhaps even safer than FDs that give a higher return. A Pradhan Mantri Vaya Vandana Yojana, which is PMVVY, operated through LIC, gives you roughly 7.6% annually.
But it’s limited to, I think, 15 lakhs per person. If you have both your parents are seniors, it applies only to senior citizens. They both get 15 lakh limits, so you can get 30 lakhs into it. 30 lakhs at 7.5% is roughly about 2.2-2.3 lakhs per year, which is roughly Rs. 20,000. So that’s like almost saying the government guarantees you 7.5% and about those rates. Then there’s something called a Senior Citizen Savings scheme operated through the public sector banks, you have, again, 15 lakhs per person, for two people it is 30, only available to senior citizens, 7.4% roughly is the interest rate.
So here again, you’ve got a semi-government or quasi-government guarantee to the whole thing and you get 7.4% interest. All this is taxable. So, what I’m trying to tell you here also from a tax perspective, but you don’t have tax when your only income is up to five lakhs. So, you don’t have to pay any tax.
Another option is the Senior Citizen Savings scheme that is operated through the public sector banks. It is again limited to, 15 lakhs per person, for two people it is 30, only available to senior citizens, and offers a 7.4% interest rate roughly.
How Do These Lowered Interest Rates Affect Loans Given By Banks?
Well, these lowered interest rates offered by banks hardly lowers the interest rate charged by banks on loans. Understand it through a simple incident.
A few days back I was approached for a loan. The person on the call asked me, “Can I give you a loan again? And I said, What’s the cost? And she said, ‘9% fixed’.
I was familiar with this term, so I said, ‘What do you mean fixed?’ And what does that mean?’
She said, ‘No, no, it’s a one-year loan. So, if you take one lakh and you only pay Rs. 9000.’
Again, I asked, ‘If I’m paying you the loan back, every month. So, what does it effectively mean for me?’
She said ‘16%’.
I said, ‘Are you out of your mind?’. Your interests in deposits are down to 4.5%. And you’re charging me 16% for an asset-backed loan.
She’s like, ‘okay, that’s what we have. We will cut it down to 15%.
So basically, loans do not reflect these lower interest rates.
India Needs New Rules For Collateral Loans!
India needs to bring some changes in the rules for collateral loans. Just think you have a housing loan, then why should the papers need to be submitted to the bank, I mean the property is already registered to the registrar, and the registrar already knows that there is a kind of loan on that property. The bank can register at the registrar, it’s electronically registered. You don’t even need documentation.
We have got UPI, we have got centralized banking, then why not our collateral is centralized?
Having property paper submitted at the bank prohibits us from taking the loan from some else bank that offers better rates to me. If the collateral also gets centralized, then it will just a click, and collateral can automatically move from one bank to the other.
If a loan is paid 100% by depositing money into a certain account, the bank should be forced to close the loan instantly, which means the RBI guidelines should be, the minute the loan was received, the loan is closed, and you have 24 hours to return documents or start the process.
Even in this COVID pandemic, banks were not loose with their loan policies. Even if you pay the money you owe them, they will not send you your property paper by post or by coming to your house. You only have the option to visit the branch, stand in line and get your paper cleared, that too in not less than five days a month.
So basically, there is a need for some new strategies for collateral loans. Make collateral electronic, where you could even have a centralized electronic system for collateral where all liens are communicated to the respective regulatory authorities.
If Not FD’s or Loans, Then Where To Invest?
Well, it is now very clear that FD’s can only provide safety to your investment but not growth, and in the scenario of so much high-interest rate asked by the banks on loans, it is foolish to get a loan. So, what’s the option.
Here the option is investing in mutual funds. They are risky, as they invest in companies’ stocks and shares, but they have the feature to boost up your investments and let your money grow ideally. There is a wide range of options to invest in mutual funds. You have Equity mutual funds where you can go investing for long-term, high risk, and more returns. You have hybrid funds, where you can invest for 5-10 years, moderate risk, and good returns. Then you have debt funds where you can invest for 3-4 years, with very low risk and good returns as compared to FD’s.
For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).