Dealing with rate cut on your savings and deposit account?

RBI announced cut in repo rate by 25 basis points to 6% on 2nd August. Recently HDFC Bank, ICICI Bank, PNB, and SBI have cut their savings rate by 50 basis points to 3.5% from 4.0%, the lowest in six years. The cut seemed imminent on the back of large inflows in savings and current accounts during demonetization period in November & December 2016.

Effective return on FD has become nil!
As the fixed deposit rates fall, retirees and other investors who rely heavily on the bank fixed deposits as their income/savings avenue have been hit the most. Bank FD returns are fully taxable too. An investor in the highest income slab, a 7.25 percent return translates into a 5 percent post-tax return. Since inflation is hovering around the same figure, the real return is almost zero. Fixed income products, at best, are merely capital preserving in nature and not meant for wealth creation.

Mutual funds have superior risk-return portfolio
Mutual funds offer a large basket of products for both the risk-averse and risk-seeking investors. For a marginally higher risk, a risk-averse investor can earn significantly higher returns in Debt Mutual Funds (Read more: Similarly, Equity Mutual Funds can generate a higher marginal rate of return on a marginal increase of risk. Historically well-managed equity mutual funds have generated an annual return in mid-to-high double digits over a long time horizon. While investors face re-investment challenge in fixed deposit instruments, with mutual funds, the money stays invested as long as it gets redeemed.

Choice of products and continuous appraisal is critical to successful wealth planning
There are hundreds of schemes to invest into but there are 3 critical factors that go into the choice of products: 1: Risk appetite, 2: Financial goals and 3: Time horizon. A prudent investment advisor will regularly monitor your portfolio and suggest adjustments according to the changes in the economy and market conditions or to any new developments in your personal life.

Refer to the following illustration as a guide to a risk-return matrix for Equity Mutual Funds:

Only for illustration purposes and not to be construed as indicative yields/returns of any MF schemes.

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Debt Mutual Funds

There are a large number of instruments that an investor can choose to invest in. Many factors go into determining the right product but primary considerations are investor’s risk appetite and time to payout. Debt Mutual Funds are a good choice of investment for individuals who want medium return at low risk.

Debt mutual funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. For the risk-averse investors debt mutual funds are better alternatives to fixed deposits due to following reasons:

Debt mutual funds have higher liquidity – you can withdraw your investment in part or in full and the money will be credited to your account the next day. Debt funds are also more flexible than fixed deposits since you can invest small amounts every month by way of an SIP or whenever you have surplus cash. Opening a fixed deposit every time you have some extra cash in your bank account is impractical. Additionally by moving your money into debt funds, you don’t lose a day’s growth.

In the long term, debt funds are far more tax efficient than fixed deposits. Income from investment above one year is treated as a long-term capital gain and is taxed at either 10% or at 20% after indexation. Income from fixed deposits is taxed on an annual basis whereas in debt funds, the tax is deferred indefinitely till the units are redeemed.

The pre-tax returns from debt funds are comparable with those from other debt options such as fixed deposits and bonds. Short-term debt funds are not affected too much by interest rate changes in the economy and investors continue to gain from the accrual of interest. But funds that invest in long-term bonds are more sensitive to changes in interest rates. If interest rates decline, the value of the bonds in their portfolio shoots up, leading to capital gains for the investor.

If you wish to discuss more about investment opportunities in Debt Mutual Funds, please write to us at

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Make your money work hard

By Charanjit Basumatary

Earlier we posted the SEBI survey finding on the investing habits in India. I decided to conduct a similar study within my group of friends. They are successful professionals – senior engineers, executives and mid-level managers at reputed companies, yet they had little idea about their personal finance. Most of them had investments only in Fixed Deposits and PPFs. This trend was very similar to the one in SEBI survey. From my conversations, I found that there were 3 main reasons for such trend –

  • Investment habits passed down from parents/family
  • Society advocates risk-aversion
  • Busy weekdays and lazy weekends
  • Habits passed down from parents/family

    Parents play an important role in our personal finances – most of my friends claim to have invested in FD accounts because their parents suggested doing so; the remaining ones conceded that FD investment seemed like a natural choice as in the case of their parents. What worked during the times of our parents does not necessarily function in the same manner today. Financial markets are highly developed and liquid now, and regulations are much tighter for the sake of investor protection.

    Our propensity to risk aversion

    Engaging in a risky activity goes against the standard societal practice. None of us want to end up as the only fool in the bunch. We tend to relegate everything other than FDs and PPFs as risky while failing to understand that FDs and PPFs generate investor returns in a similar mechanism as mutual funds do, albeit the returns can differ significantly.

    Over longer time horizon, mutual funds comfortably and consistently beat FD and PPF investment. The implication of this is huge – as illustrated in the table below, your lump sum investment of 1 unit in FD would yield 4.2x after 20 years, compare that to 9.6x return in case of mutual fund with 12% CAGR. You may ask – 12% year-on-year growth for 20 years, do such funds even exist? As a matter of fact, oldest running blue chip mutual funds have generated more than 15% CAGR over the period of 15 years.

    Table: Compounding returns at different rates and investment horizon

    Our modern lifestyle

    All of us complain about being too busy on the weekdays, naturally we reserve our weekends for less stressful activities. Planning personal finance is no doubt an intensive process; however every weekend gone is an opportunity missed.

    Contact an expert on personal finance, educate yourself on various investment options and start investing early to exploit the phenomenon of compounding returns. Although many alternatives are available, SIP investments in mutual funds work the best for retail investors. Amongst many reasons, the most important is that your money is being managed by professional investors who work 24×7 while you can enjoy worry-free weekends.

    To sum up, we work very hard for money, now it’s time for our money to work hard.

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    Small steps to big returns

    By Ashish Tyagi, Senior Equity Strategist, Divitas Capital

    Confucius, a great Chinese teacher and a philosopher, said that a journey of thousand miles begins with a single step. The journey of personal financial planning is no different from any other journey – one has to get started, the earlier the better. All of us need guidance on managing personal money in order to fulfill goals of leading an outstanding life, pursuing an excellent education and saving for a better life.

    Systematic Investment Plan (SIP) is that step, albeit small and steady, in the right direction to accomplish financial goals. Investors are mostly worried about timing the market and tend to wait for an opportune entry point. In many instances, a potential investor may end up not investing at all.

    How SIP works?

    With SIP, you do not have to worry about market risk and timing because the cost of investment averages out over the duration of your investment horizon. SIP is a financial tool that can create wealth through investment of a fixed amount at pre-decided regular interval, over a period of time. It is easy to understand, convenient to execute and instills discipline amongst investors. In the long run, SIPs can generate high returns even as the financial market rides the waves of volatility.

    Benefits of SIP

    The biggest advantage of SIPs is that you do not need to time the market. Further it provides twin benefits of power of compounding and rupee-cost averaging. The key benefits are listed below:

  • Disciplined approach to investing
  • Flexibility and convenience
  • Moderate risk
  • Rupee-cost averaging
  • Power of compounding

  • Financial calculators

    It is important for an investor to list down the financial goals and work out a plan with their advisors to achieve the desired goals through SIPs. Financial calculators play a crucial role by estimating the returns on the basis of corpus and tenure. You may visit the Financial Calculator section ( of our website to determine the quantum of savings necessary to achieve your goals.

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    The Concept of Financial Risk

    Variance as a measure of risk

    The standard definition of risk according to modern portfolio theory is the measure of variance (or standard deviation) of the portfolio’s return. In the table below, we can see two portfolios with the same average return, yet the individual returns of portfolio “B” are way more varied than portfolio “A”. This is measured statistically as the standard deviation of returns.

    Returns % Portfolio “A” Portfolio “B”
    Year 1 8% 5%
    Year 2 10% 13%
    Year 3 7% -1%
    Year 4 11% 15%
    Year 5 9% 13%
    Average Return 9% 9%
    Standard Deviation 2% 6%

    Systematic vs. Unsystematic risk

    Unsystematic risk
    is simpler to understand. Such type of risks is unique to each of your investments e.g., an investment in a stock or bond of a specific company. This investment will have a specific risk associated with it, specifically the risk associated with the company’s performance and the industry it operates in. It is easy to mitigate this risk by diversifying the portfolio, which basically requires an investor to NOT put all of their “eggs in one basket”.

    Systematic risk
    is a slightly trickier subject; it basically is the risk that is common across the portfolio. For example if all your investments are in equity funds, then your investments are at risk if there is a flight of liquidity from equity markets. Diversification can help here too, but it is important to understand the nature of systematic risk. Say for example you also invest in fixed income funds to diversify risk. The whole portfolio would be at risk if there is a downturn in the economy and companies struggle with operations and debt obligations, resulting in losses in both the debt and equity portfolio. If you had invested in real estate to further diversify risk; remember that these are all Rupee-denominated investments and inflation can wipe away all your real gains in equity, debt and real estate. The moral here is that systematic risk can never be fully eliminated, only minimized.

    Risk from a time perspective

    Another perspective on risk is that of time horizon. Different asset classes show different characteristics over different time horizons. For example, equity fund returns may seem very risky from a time perspective of less than a year as compared to fixed deposit of a similar maturity. A one-year fixed deposit will earn you an assured 6-7%, while equity returns can vary from -20% to +20%. But the same equity asset class looked at from a multi-year perspective will give you 12-15% return averaged over a number of years with a high degree of certainty.

    Additionally, a time related risk is that of business cycles. During times of an economic boom, stock market returns will show phenomenal growth lulling the investor into a false sense of security that this is the status-quo and things will remain as rosy forever. However, this can change very quickly when the economy endures a prolonged slump and returns can be sluggish for years. These cycles can last for 3-4 years in each phase and dent the investor’s portfolio significantly if she is not aware of what is going on and enters and exits at inopportune times. The best way to avoid such pitfall is to remain vigilant during boom times, diversify risk and exhibit patience during slumps to ride out the bearish cycles to generate healthy returns.

    Quantum of risk

    Different financial assets have different quantum of risk associated with them. For example a debt instrument may not exhibit any variance in returns as the payments are fixed but carries a risk of default where an investor can lose all of her capital in one go. While an equity portfolio may lose value more often as the returns are a function of its price; it will typically not lose more than 20-25% in the worst of times for a well diversified portfolio. To understand this risk better, an investor should carry out a Value at Risk (VaR) analysis to determine how much her investments could lose in value in the most adverse circumstances.

    Managing risk

    We now have a basic idea of what risk is. There also exists a rough relationship between risk and return; i.e. higher the risk, higher the potential gain/loss.
    But what does this signify? More importantly, what does it signify for you as an individual investor? The first step any individual should take before starting to invest is to determine her risk profile. Your risk profile depends majorly upon 2 factors.

  • The first is, where you are in life, i.e. what is your age and how many financial responsibilities you have, this helps determine how much to invest, where to invest and for how long.
  • The second is what your risk taking predisposition is, i.e. how conservative or bold you are with your financial investments. This can again be a function of where you are in life but also significantly depend upon your personality type.
  • To summarize, understanding your risk appetite and goals go a long way in allocating capital prudently while avoiding any major investing pitfalls.

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