Your savings in banks depleting by 2%
The savers are the most affected in the post-Covid world. They are earning negative real rates on their bank deposits
Why do you keep money in banks and not in lockers at home? So that money kept in your savings account earns some interest amount. Idle cash at home will earn nothing. What if we tell you, your savings in the bank account is losing value? Your money is depleting. Surprised?
You shouldn’t be if you understand the concept of inflation. If inflation in the economy is 6% per annum, it means what you can buy with Rs 100 today will cost you Rs 106 next year. If you want returns on your Rs 100, the interest rate has to be more than 6%. Currently, interest rates are at multi-year low. The Reserve Bank of India (RBI) has fixed the repo rate at 4% while retail inflation is hovering around 6 per cent. Thus, the real rate in the economy is negative 2%. Simply put, an investment earning 4% is in fact losing its purchasing power by 2%.
Savers the worst-affected lot
The savers are the most affected in the post-Covid world. They are earning negative real rates on their bank deposits. The average time-deposit rate on new deposits was at 4.38% in May 2021, pointed out foreign brokerage firm Nomura in a report. The retail inflation during the same month stood at 6.3%, thus a negative real rate of 2%.
“This potentially explains the rush into equities or other riskier assets such as cryptocurrencies. Negative real rates promote riskier behaviour among investors. If real rates remain negative for long it may create asset price bubbles,” cautions Niranjan Avasthi, Head – Product, Marketing & Digital Business, Edelweiss Asset Management.
What should you do?
If you have a good amount of money in banks or you earn substantial lumpsum amount, instead of keeping it banks, you should consider paying off your debt first. You may advance your big-ticket purchases instead of delaying it.
If paying off debt or making big purchases are not an option, investment is the only way out. Measure your risk appetite first.
“Keeping funds idle in savings bank account is not advisable. If you are a conservative investor invest in liquid or money market fund for a time horizon of less than three months, Ultra short, Banking and PSU or Low duration funds for a time period between three months and one year. One can also look at arbitrage funds for a period above three months,” says certified financial planner Pankaaj Maalde.
If you are fine with some equity exposure, hybrid funds could be a great choice too. “First-time investors looking to invest in equities should start with hybrid funds. They should aim at earning positive real returns and not higher returns. Funds like Equity Savings Fund and Balanced Advantage Funds are good choice for such first timers. These funds can potentially earn positive real returns and also protect from equity market volatility,” points out Avasthi.