By nature, Indians are known to be the biggest savers on the planet, with almost 35% of the total earnings being part of their overall savings. Indians are programmed since their childhood in such a way that they always save some part of money in hand. For example: Parents giving daily allowance to their school-going kids teach them to save something from the total amount. If Rs 10 note is given to the kid on a daily basis, he is taught to save at least Rs 2 to 3 from the total amount. And with this kind of “safety-first” approach instilled, people tend to look for safe investment options in India. But are these options really safe or safe enough?? Lets find out:
Liquidity refers to the property/quality of an asset to be converted to hard cash with ease at a very short period of time. An individual in need can withdraw his savings from his bank account through his ATM even in the middle of the night. It is in human nature to consider “in hand asset” to be of prime importance and that is why, major share of Indian saving is kept in bank saving accounts. Ease of liquidity is one of the most important factor which an investor should look for his investment. But does this option hold equal importance against other safe investments? Let us consider PPF for this case. Majority of the people in India decide to put a part of their savings in PPF as it is a safe and secure bet.
But what about liquidity factor?
PPF has a lock-in period of 15 years and partial withdrawal can be made only after 7th year. An individual investor in any emergency scenario would not be able to take out anything out of this “safe” option. So liquidity factor should be considered while searching for best investment options in India in 2012
Real Rate of Return
Real rate of return is the rate an investor earns on his investment which is over and above the rate of inflation. A simple arithmetic equation works out like this: Mr Amit has invested Rs 1 lakh in a PPF account on 1st Jan, 2011. He will be earning somewhere close to 8.6% return on his investment (For current financial year, government has declared it to be 8.8%). That means, by the year end, he will have 1,08,600. But as we all know, inflation rate in our country is hovering in double digits for last few years and currently its around 6% to 7%. This inflationary figure means that any thing which Mr Amit would have purchased for Rs 1 lakh at the begaining of the year (lets say Sony home-theater system) would now be costing him Rs 1,07,000. Thus, the real rate of return on Mr. Amit’s investment would be 1.6% which would prove to be highly inadequate for his future financial goals. This is another draw back of safe investment options in India.
Yes, this is a unique kind of a risk, associated with most, if not all, kind of safe investment options presumed by the society. Indian mindset believes that anything related to government will be safe and their interests will be looked after by the government. I believe most of us will be surprised to know that interest rates have come down from the highs of 12% in 1986 to the current levels of 8.8%. In the same way, it is not to be presumed that government is acting against the interests of the common people or investors. It is just that there are political compulsions as to the reality and dynamics of the economy, and government has to take the call accordingly. (Please see the picture below).
Another factor which can hamper our “safe” investments is tax implications related to the investment. Almost whole of the investor community, be it large or small ones, believe that nothing can be safer that investing in real-estate or gold. True to a great extent but how many of them realize the implications of taxation on such investments?? Gold investment include wealth tax and capital gain where as real-estate investments has to be within the frame work of laid guidelines. An easy way out adopted by most, is not declaring these investments in the book – which in turn gives rise to black money or parallel economy. May I dare say that these safe investments are harbinger of black money.
This post by Nine Million Dollars does not wish to say that all these investments are wrong or not the best investment options in India. Just want to bring to our reader’s knowledge that we have to keep all the above mentioned factors in mind before deciding which investment is safe and which is not