Traditionally, majority of investors have parked a bulk of their savings in bank deposits. Bank deposits account for 23.91 percent of household savings as per Q3 20-21 Reserve Bank of India (RBI) data. However, fixed deposits (FDs) rates have been declining (2.9-5.4 percent) due to the quantitative easing policies adopted by the RBI.
Inflation has also drastically curtailed the real return from a fixed deposit, thereby capping investors’ ability to achieve their wealth creation goals. Along with this, taxation on FDs is based on the investor’s income tax slab, further reducing returns.
Investors should now look at options to potentially earn better inflation-adjusted and tax-efficient returns while having access to their money anytime. A Multi Asset Fund can be that option.
Over the last few years, we have witnessed a spate of banking crises due to rising NPAs (Non-performing Assets). This makes you wonder – is the rate of return that you are getting from your FD indicative of the true risk? The reality is that many investors have lost their hard-earned money due to financial irregularities at some banks. And consequently, RBI has had to intervene with the Rs 5 lakh deposit insurance. Moreover, with the pandemic-induced economic deceleration, there may be increasing NPAs.
As quoted in Vivek Kaul’s bestseller ‘Bad Money—Inside the NPA Mess and How It Threatens the Indian Banking System’, when bad loans go up, the stability of banks is questionable, which eventually derails the entire economy.
— Is your money in a bank FD or a savings account providing you real returns?
— Are you concentrating all your savings in a single bank account?
— Can an alternative option like a Mutual Fund give you the similar returns as a bank FD?
As mutual funds offer long term risk-adjusted returns and provide diversification, liquidity and professional management, they are a great option to consider in comparison to a bank FD. However, choosing the right type Mutual Fund is critical, one with the similar risk profile that you are expecting from an FD
As the old adage goes, ‘don’t keep all your eggs in one basket’, investors should always consider a diversified portfolio of equity, debt and gold assets.
At the onset of Covid back in March 2020, markets fell by over 40% in just one month. After the 2008 crisis, markets fell by 55% in few months. So, you don’t know when that trigger will come, which leads to uncertainty in equity markets.
While equity mutual funds offer potential to build wealth over the long term, debt funds add to the stability and liquidity. While the presence of Gold adds a risk-reducing, portfolio diversifying benefit. The negative correlation between these assets & regular rebalancing of the portfolio will minimize the impact of losses driven by falling markets.
Investors looking for a sensible option for their bank FDs should build their own allocation or invest in a readymade diversified Multi-Asset Fund of Funds. The Quantum Multi Asset Fund of Funds is designed specifically to be an option for those investors who have parked their money in a 3-year Fixed Deposit. Fund managers rebalance the portfolio from time to time based on market movements in the three asset classes of equity, debt and gold.
(The writer is Chief Business Officer, Quantum AMC. Views expressed are personal)