A banker's case for bank deposits

INVESTING

Historically, shares and stocks have provided higher returns than the bank deposits or investment in government schemes. But it is important to remember that this calculation is based on a basket of stocks or a portfolio or an index.

Within this portfolio, there lies a lot of horror stories, many shares which are not worth the paper printed on, others perennially promising but never delivering etc.

The blue chips outperform others consistently, but they are often priced sky high and the yields on investment on price that you pay are much lower than the bank deposits, if you need a regular annual income.

Even a 100 per cent dividend works out to 2 per cent if you have paid Rs 500 for a Rs 10 rupee share. The answer for a good investment strategy lies in understanding your own situation and needs thoroughly.

Do you like the risks, can you afford them, can you withstand the heartbreak of seeing values going down daily, do you follow your instincts, can you withstand the temptations and be ruthless in implementation.

Mutual funds once promised to be ideal for small investors, giving choice of investment and good return. But overall, they have proved laggards and showed more often than not, that fund managers, after all, are also human.

The reduction in interest on bank deposits is the effect of the winds of globalisation, which has promised us prosperity, competitive populism to bring down rates and a desire of the government to bring down its own deficit.

Only seven eight years ago, we were paying 17 per cent on non-resident, non-repatriable deposits and 11 to 12 per cent for a three-year deposit two years back. Those kinds of rates were in any case unreasonable, born out of an economy starved of capital for investment.

Things have changed since then but falling of interest rates even below the increase in wholesale price inflation rates and much below the retail inflation is not good for the country in the long run.

If interest rates on deposits considered 'safe' do not rise above the inflation level, the capital that an investor holds is diminished. It is a strong disincentive to individuals saving for their old age and inheritance, a sure recipe for social disaster.

Already family bonds are diminishing and old parents are not welcome in modern urban societies. Where will they go if they can't be financially independent?

When we talk of small investor, my definition would be the one who needs to provide for himself and his family. The quantum will vary with the size of the family, the lifestyle and the socio economic condition.

This class will always remain the backbone of the banking system. It is for the banking system to protect their interests, not through handouts, but through positive intervention and speaking on his behalf.

While there is no way banks can assure them of a comfortable lifestyle out of returns from bank deposits, the collective might of banks should be used to ensure that in the competitive populism to go global and protect the interest of industry and trade, they are not wiped out.

As for the savers themselves, they will have to understand that for living on interest, with vision of keeping the capital for inheritance, the savings have to be large enough, almost double that was considered adequate upto the past couple of years.

They should also be prepared to dip in the capital itself to make a living in old age. I strongly believe that the typical investor in bank deposits and government securities should stay invested and only go in for higher risk stocks, property and such investments when they have surpluses beyond their regular needs.

The dilemma of the small saver is genuine and so is the yearning to get better returns on investments. The sufferings of the elderly and fixed income groups are also genuine.

The fact is they have been left out of any calculations that the Govt. the economists and the special interest groups representing industry in this collective clamor for declining interest rates.

It would not be wise to fiddle with interest rate regime, but at the same time, it would be proper if government and the Reserve Bank of India gives up its positive discrimination in favor of lower interest rates.

After all replacing one bias (giving unsustainably high interest rates in the past) with another (below inflation level interest rates) does not in any way enhance social justice.

It is my firm belief that for low capital, small saving people advanced in age, there is no alternative to bank deposits. For the adventurous, there will always be better opportunities.

Returns from shares and bonds, never materialise till the decision to sell is taken, and that too in time.

Portfolios that remain untouched gather moss. Only those who have this temperament and patience to do this day in and day out, will be advised to take to them. Some day mutual funds will play their rightful role; but till then don't write off bank deposits as your first investment option; it is often the best over a long term.

The author is the former chairman and managing director of Bank of India. kvk61@hotmail.com