Your Money: Take a multi-asset approach when interest rates are low

October 7, 2020 1:45 AM

With returns dwindling, many investors have to now explore other investment avenues for higher returns than bank fixed deposits.

Reduced economic output has caused a big drop in tax collections, even as the government has rolled out a Rs 1.7-lakh crore stimulus plan to cushion the economic damage caused by the virus-induced nationwide lockdown.Reduced economic output has caused a big drop in tax collections, even as the government has rolled out a Rs 1.7-lakh crore stimulus plan to cushion the economic damage caused by the virus-induced nationwide lockdown.

By Ghazal Jain

It’s october and we are more than six months into the Covid-19 pandemic. Yet, the two headlines that are dominating news this week are: India overtakes Brazil as the country second-worst-hit by Covid-19 and the International Monetary Fund confirms India’s GDP worst-hit among G20 nations.

Clearly, Covid-19 pandemic seems far from over and we are staring at a protracted economic deceleration. There still continues high uncertainty on how this will unfold.

Reduced economic output has caused a big drop in tax collections, even as the government has rolled out a Rs 1.7-lakh crore stimulus plan to cushion the economic damage caused by the virus-induced nationwide lockdown. This will mean higher fiscal deficits for the government. It is estimated that the fiscal deficit in 2020-21 may shoot up to 6.2% of the GDP from the current target of 3.5%.

Low interest rates
As the government borrows more to finance its spending and burgeoning fiscal deficit, coordinated fiscal and monetary policies will be needed. Thus, the Reserve Bank of India will continue to intervene in bond markets to keep interest rates low and boost economic growth for the foreseeable future. The central bank has cut repo rates by 2.5% since February 2019 with the most aggressive cuts coming in recent months.

As a result of RBI’s accommodative monetary policy over the past year, fixed deposit rates of banks have been slashed massively. For instance, the 10-year fixed deposit rate of India’s largest bank is 5.4% as of October 6. On the other hand, inflation levels have remained above the 6%-mark in recent months and spiked to 6.93% in July.

What this translates into for the Indian fixed deposit investor is deposit rates going down plus inflation going up which equals to negative real returns.

Negative real returns
Negative real returns mean that inflation is higher than interest rates for depositors. Therefore, savers will see a fall in the real value of their savings and the interest on the savings will be insufficient to meet the increased cost of living. This is bad news for those who rely only on bank fixed deposits for their savings and investment needs.

Even though bank fixed deposits offer enormous safety in these uncertain times, safety isn’t enough. With returns dwindling, many investors have to now explore other investment avenues for higher returns than bank fixed deposits.

Equities give higher returns with high risk, more than keeping par with inflation. But for someone with a low risk appetite, making the shift from the stability of fixed deposits to the volatility of equities is not easy. However, a multi-asset approach can navigate treacherous markets with the right allocations and would be an ideal way to get a flavour of equity investing.

With right equity allocations before Covid-19, remember equities were running at very high valuations then, a fund running lower allocation to equities balanced with appropriate gold and debt allocations could have ensured that the fall in fund value was not as brutal as the stock markets.

One should not exit fixed deposits completely as every asset has a role in one’s portfolio. It would be prudent to diversify one’s investments in bank fixed deposits for safety and protection and in a multi asset fund to boost returns.

The writer is associate fund manager, Alternative Investments, Quantum Mutual Fund

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