Interest rate on downhill, time to cut your bank deposits

The Sensex ended the last week at 28051. Though there was a fall of 156.76 points on Friday, the mood is upbeat and the general feeling is that it is likely that there will be a bull run. The indications are all there. Corporate results are better. The rains have been very good last week and it would seem that India would experience a better-than-anticipated monsoon. India's exports after being depressed for 18 months rose 1.27% in June 2016 to $ 22.57 billion, effectively reversing a trend that began in June 2014 due to weak global demand and falling oil prices. Imports fell 7.33% in June to $30.69. Oil imports too fell 16.4% to $7.2 billion. Gold imports have also fallen, leading to a narrower trade deficit of $ 8.1 billion. Unfortunately, inflation is still high at 6.59%. India seems to be doing better than most countries in the world and is, therefore, being viewed as a serious investment destination.

The majority feel that the prognosis is good – that the Sensex will not fall below 28000 but that it could rise conservatively to around 29,500 or more by the year end. A respected fund manager has even predicted 33000 though that might be a little far-fetched at this time. With Reserve Bank of India governor Raghuram Rajan's departure it would appear that interest rates would fall as there is increasing pressure from the government to raise the credit offtake. The denouement of this would of course be a fall in fixed deposit rates offered by banks. Consequently the funds you've kept safe in banks will earn you less and then even less. It is expected that the rates may go down to between 6.25% and 6.50%. Therefore, it is critical that one looks at deposits in banks.

My suggestion is that one should only keep the minimum in fixed deposits. The quantum should not be more that 5% of your assets and should be kept as a safeguard for an unexpected happening – one where you may need funds immediately. And I believe everyone should do this especially senior citizens who have retired and not being very investment savvy have kept all their wealth at the bank – sacrificing income for safety and wanting to be assured of regular income that is certain. It may be certain but I do not think they or anyone, in these inflationary times, can be content with a fixed income with reducing returns coupled with the reducing purchasing power of money. The investments have to be hedged against these.

If you need reasonably liquid funds that are easily available and are not risky, my suggestion would be to place it in a liquid fund with a good mutual fund. It would give you a return in excess of 8% and you can literally get the money the next day. However, the money so placed should not be more than 5% of your investible funds.

The balance I believe should be kept in equities. There are two ways you can do this. You could invest directly through your broker or alternatively, you could (if you have at least Rs 25 lakh in hand), retain an investment manager to do that for you. These managers will place your funds in shares they believe have potential, often claiming that in the past they have rewarded their clients with returns in excess of 40%. In this regard, I am a little sceptical. My concern is that if I give them the funds I would lose control of it and permit them (for a fee) to make decisions on how to place my funds. In a worst-case scenario, the investment manager may make several incorrect investments which though they may not make a loss may result in a gain of say 10%.

On the other hand, the monies I had invested in strong large cap shares may have risen by 23%. Having said that, if you are very busy or not particularly savvy about shares my recommendation would be to either invest in industry leaders and large-caps as the downsides are low) or place your trust in a good investment manager. Otherwise, if you know your way around the market, I strongly suggest you make your own investment decisions.

The writer is MD, Cortlandt Rand, and an author