We have already had an endless debate about Indian government’s demonetization move and do expect a drastic change in the way of spending, saving and investing themselves. Though the prime motive of demonetization is to unearth and eradication of the black money, it would have multiple positive effects on the economy. At the same time, the move has forced people to ride on cycle of new cashless economy. People who earlier received cash incomes and spent in cash, which constitute at least 40% of all households in the country, would now take an unintended advantage of the cashless economy. Another benefit of being a part of the formal cashless economy is that the incomes and expenditure patterns of individuals would start reflecting in their bank records. Each of us will have access to our own expense data. With the help of aggregators, we can track every paisa spent through each of our debit cards, credit cards and our e-wallets at all in one place. Demonetization has taught us a new lesson to maintain precious cash, which is to be spent on absolute essentials only. With access to our expenses and automated budget tracking, we can extend this great habit and control our expenses. With people realising soon, they would have more room to leave surpluses to be invested. But the people have bigger challenge is how to convert their robust savings into right investments to get better returns. While the exorbitant debate on demonetisation is worthless, it would be prudent to take a deep breath and understand how we manage the idle cash, which has now been become the part of formal banking channel.

liquid

Don’t Lose Value

Since all illegal tender monies have been fetched into saving bank accounts, should certainly ensure that idle cash could earn some return, which beats the inflation of consumable goods and services.  Undoubtedly, the saving bank accounts are secure and easy accessible, in return for this safety and convenience your money may not earn more than 4% average that the most bank saving accounts offers. We have fixed deposit option but most leading private and public sector banks have recently been cut their interest rate on fixed deposits (FDs) to the tune of 6.50% to 7% per annum, which are still getting around post-tax return at 4.69% p.a. As evident that both saving and fixed deposit options would not have grown at the rate required to keep pace with inflation. And the impacts of inflation on the value of money compounds with time resulting funds held into low-return products will certainly the erosion in value, would mean that money may be inadequate to meet even short-term financial goals. To earn the return aligned with inflation; you would have to be willing to trade-off the safety and convenience to some extent.

Risk-Return trade off

Generally, we prone to consider an investment as risky in terms of a possibility of losing the capital invested. But this absolute definition of an investment’s risk may be misleading, and even harmful, when we used to think in the same way while making decisions of investing.  But we ignore the hidden risk in all fixed bearing instruments including bank fixed deposits as they also carry some nature of risk. The biggest risk in bank fixed deposit is the risk of re-investment. With the rates set to go lower, there is neither a guarantee to get the same rate of interest as you earn on today itself nor earn even after 2 years or at the end of maturity. Every investment choice, even the choice not to invest, brings with it certain risks to your financial security. It may be the risk of your money losing value, or it may be the risk of low returns that put your goals at risk or it may be the risk of volatility in the returns and losing value. It is important to recognise and understand the inherent risks cannot be eliminated but their impact can be mitigated by matching each product to a financial need. Another trade-off that you can make to earn better returns is to accept volatility in your investments. The overall portfolio investment returns is measured in making of a proper asset allocation such as liquid, debt, equity and gold. No single asset could be made in trade-off between risk and return. Even bonds will depend upon the change in the price of the investment. When the price appreciates, the total returns you earn goes up, and vice versa. So recognise the importance of staggering the investments and stay over a period of time to reduce the impact of the volatility, and rebalance the investments based on performance and your investment horizon, and then such investments could provide you the opportunity to earn higher returns. Each investment should be assigned a defined role in your financial plan based on its return and risk features.

Inflation protected returns

While the inflation-protected returns will safeguard the value of your idle cash in saving account as there is still the risk that bank saving rate may not be adequate to meet your regular expenses. Keeping cash as idle in saving account could hamper your purchasing power, will mean that your contribution you need to make to the goal from your savings can be lower. It frees up savings to be used to meet other goals. But higher returns can only be earned when you are willing to take some risks on the principal invested and the expected returns from the investments.  Liquid funds can be a good choice in such scenarios. These are mutual fund schemes that invest in fixed-income securities that mature within 91 days, are the most stable in returns as they earn from interest accumulated on underlying securities. There is the ultra short term fund category which also has a similar structure. The biggest advantage is that you can redeem at any time without any penalty.

It must be noted that money market mutual fund may be just the product to hold your funds until all current turmoil financial market situations get normal and has to be funded in the immediate short-term. However, they cannot be used for long-term financial goals as the impact of inflation is going to be negligible as the funds are kept in debt funds.

PS: This article got published in Hindi’s Dainik Bhaskar on 03-01-2017

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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