Investors continue to prefer bank fixed deposits and insurance as investments, rather than focusing on boosting of returns.
A large chunk of investment choices are in low-yielding assets and that tends to drag down an investor’s overall return, say experts.
The Reserve Bank of India’s latest annual report shows investors put Rs 647 billion last year in new commercial bank FDs.
Bank deposits comprise 56 per cent of a household’s investments.
Says Vishal Kapoor, head of wealth management, Standard Chartered,“The bank fixed deposit has been a traditional investment across emerging markets and for most investors, as there's a safety and comfort attached to these products.”
Insurance is another large category of investments; it accounted for 16.4 per cent of a household’s financial savings (down, though, from 19 per cent the year before, as investors have been wary of mis-selling in this category.
Investors also hold a large chunk of assets in currency and savings accounts, which yield minimal returns.
About 10.2 per cent of a household’s wealth is in cash.
And, barely 3.1 per cent of a household’s wealth is invested in shares and debentures, where potential returns are higher.
An analysis of these patterns suggest investors are not answering basic questions, such as which type of investments to choose and how much of your money to put in each of these to yield better returns.
Says Amarendra Phatak, director, private wealth, Ambit Capital: “The basic premise for investors has been safety and that trend is visible across India in investing patterns. Investors are also not making any basic changes in investing habits.”
A major problem over the long term in these assets is that they barely match inflation.
Savvy investors know that holding cash yields nothing and keeping money idling in savings accounts fetches on average about 3.5 per cent yearly. On the contrary, idle cash loses purchasing power.
One-year bank FDs earning 8.5-9 per cent are taxable in the hands of investors.
A back-of-the-envelope calculation suggests the 65 per cent of household savings in FDs and cash will earn investors just about 7.5 per cent in pre-tax yields.
That leaves investors nothing in their hands, as consumer price inflation is around 9.5 per cent annually.
Says Kapoor: “Investors need inflation-beating assets. One fundamental damage they may be doing if they don’t look for such assets is that after taxes and inflation, little will be left.”
A heavily tilted portfolio towards low-yield deposits and cash tends to drag down the returns and earnings potential.
If you are following a pattern similar to this, experts advise a change to higher yielding assets.
Even small changes can a make a big difference in your corpus over a long time.
Fix the pattern
First, assess how your portfolio is positioned. If you have the bulk of investment in FDs, it’s time to shift these to higher earning Fixed Maturity Plans, that earn around 10 per cent these days, and increase your allocation to equity.
A one-year FMP also comes with a long-term capital gains tax that investors can take advantage of.
An investor’s post-tax yield on a one-year FMP works out to around 10 per cent, as compared to 6.5 per cent on an FD that comes with a coupon rate of nine per cent per annum.
Says Phatak: “It’s better to have more FMPs in your portfolio as compared to a fixed deposit.
The yields have got better in FMPs lately and investors should take advantage of it now.”
Alternatively, it’s better for investors to reduce their cash levels from 10 per cent to around five per cent, of which the bulk should be invested in liquid funds or ultra short-term funds.
Pre-tax returns here hover around eight per cent, way over the 3.5 per cent from savings accounts or the zero returns from keeping cash at home.
Liquid funds are almost like a savings bank account and investors can pull out their money in a day, if needed.
Clearly, though, investors should warm up to equities.
A three per cent portion here, as noted earlier, is very much on the lower side.
Equities over the long term give a return of around 15 per cent and experts say these should comprise at least 15-25 per cent of your portfolio on a very conservative basis and 30-40 percent for an aggressive investor.
Investors, however, are not warms up to equity.
For them, Phatak recommends a periodic approach whenever there’s a correction in this asset class.
Says Phatak, “Investors should invest in liquid funds and whenever there’s a dip in the market, investors should make use of the transfer facility and buy into equity mutual funds.”
Fine-tune your investments
- Equities and FMPs have tax advantages which will boost your post-tax return
- Reduce investments in fixed deposits to as low as possible
- Include liquid funds in your portfolio