How should senior citizens deal with the big drop in bank FD rates

By Tamanna Inamdar

It is important for investors to embrace risk even if they have not experienced it and we need a lot of advisors for a lot of people who need to do hand holding, says the Chief Executive Officer, Value Research

Bank deposits are growing at a healthy rate, loans are not. Banks have no real push or need to increase deposit rates. What can people who have unshakeable faith in fixed deposits do?
They are doomed because I do not see any change in the outlook. Interest rates are unlikely to go up in a hurry. Not only that, in fact, there will be a flight to safety to bigger banks, safer banks and relatively well known banks simply because recent experiences of depositors are quite scary. More so, given their age, the senior citizens even if they get 0.5%-1% or marginally higher return, nobody is really going to put his capital at stake.

Not only that, historically India has been a fixed depositors country. Equity penetration is very low. Nobody has really decoded the equity story even if it is an interesting story academically or theoretically or number wise or if you brought the chart, the long term story.

But nobody has experienced it simply because investors have been very seasonal. They have come in good times and in bad times they bail out cursing the market never to return, So for these people and for senior citizens, it is going to be perilous if they do not have much of an option. All they can do is optimise their return but even where they move their money to optimise their returns, something like Senior Citizen Savings Scheme or Government of India bond which will be marginally higher than the deposit rate it will come with reasonable safety but it is not going to alter their complexion.

It is not going to really comfort them not only that they will also come down very much in line with the declining interest rates.I do not see this complexion changing simply because destruction of demand is unlikely to drive inflation and I also see the central banks driving down interest rate is unlikely to drive banks to lend the way it used to and likely to boost the economy the way it has happened in the past.

Times are difficult. It is important for investors to embrace risk even if they have not experienced it and we need a lot of advisors for a lot of people who need to do handholding because the biggest risk is that there are two other risks. One is that even if a depositor is able to make a deposit and generate returns and earn interest which is good enough to support his income requirement, five or seven or 10 years from now, his capital will remain constant. So there are two needs of any depositor who depends on his lifetime savings for his income. The capital should also increase over and above the return that it is generating, otherwise he will run the risk of outliving his savings that cannot be had without equity.

Historically, in the last 20, 30, 40 years, people who are retired or are about to retire have not experienced equity in a manner that could inspire confidence. But they do not have any choice. They have to embrace risk or bear the risk of outliving their savings.

Mutual funds have been a gateway for the uninitiated into equity. They have not given great returns over the last couple of years. Where do people go right now as the experience with banks that did not have sovereign guarantee has been very bitter. What do they do then?
Undoubtedly they cannot really be blamed for anything because this is the environment. The real issue is if not investing in equity, you do not even have hope. I would say investing in equities is a general bet on the economy that will be better off sometime in future.

The whole investing culture in equity of a desirable kind has been in existence for the last four-five years. Prior to that, people used to invest in NFOs or people used to get attracted to markets investing in mutual funds, investing in IPOs only in good times. Remember the infrastructure fund boom or the technology fund boom? Only in the last four-five years, the SIP, mutual fund sahi hai campaign came up and a new crop of investors have come in.

If you are in the positive territory, investors’ behaviour is dramatically different when your Rs 10 becomes 980 and it is not that hostile. When that Rs 10 becomes Rs 12, it may not translate into great returns. The story is that 5%, 7%, 8%, 9% return on equity over the last four-five years is nothing great but still much better and it has all the hope. There is a method for senior citizens to invest in equity in a staggered way, in conservative funds, proven funds, direct plans because every rupee matters here now. This is the only way out as otherwise once you give up on hope, even fixed income is not going to get you anywhere.

You talked about staggered investments for senior citizens, but what about those with limited funds, a meagre corpus and who want to invest? Should they be looking at RBI backed bonds, NBFC backed deposits? How can one reach out to this section of savers?
There is a very clear hierarchy in my mind. How should any depositor who is a risk averse person and who requires income from his investment, go about it? If you are a senior citizen, the first step is to go for that senior citizen scheme. It gets you the highest return relatively with the highest safety. You can invest a maximum of Rs 15 lakh there and follow it up with the post office MIP. There also there is a limit and then work towards optimising your returns because the need for guaranteed income in your retirement to drive income from your investment is paramount. That is also the stage when you panic a little and so equity cannot be the first stop.

For a person who has never invested in market linked investment, people are having a hard time settling with investing in a fixed income fund and seeing the ups and downs. In fact, that’s where the returns can get optimised. It can be marginally better but it requires lot of hand holding, giving guidance on the 16 kinds of fixed income funds available and which one is appropriate at what time, what to expect, setting their expectations etc.

It is complex for people who have been used to the simplicity of working hard, making or earning a salary and parking his money somewhere and the job is done. Investing in equity is important for and it is possible only for that person who goes beyond this level because equity cannot be invested for an old person at one go. So stagger it and the only rule that you have is it should be a certain allocation, maybe to begin with 20% of your total money, if your 80% is able to support your income and then spread it over the next 24 months because the real problem is not that the equity is volatile.

The problem is that you experience volatility the moment you invest lump sum. Spreading it over time, and deciding which fund to choose is important. Not the small cap fund as that is going to be a wild ride that is meant for a person who has 10 years of time and really never loses his sleep if he sees a 20% decline in value of investment in a month.