By: Dr. Santanu Das
Associate Professor (Finance & Economics)
Uncertainty is an integral part of everyone’s life whether it is related to weather, politics, natural disasters, or our own future. While the uncertainties related to first three can hardly be mitigated by human beings, the last – our own future can be panned. Therefore, it is imperative that we need to save for our future. Given the life expectancy of Indians of about 65 years which translates to roughly a quarter of a century post working life, savings from our current income is essential for sustainability once we get into a retired life. Many of us see this savings as discretionary appropriation of our current income and therefore, we become casual at times. On the other hand, we become quite nostalgic about investments without even understanding the pros and cons. As a basic rule, one should invest money in the ratio of 60:40 with 60% of disposable income be saved in an instrument which are highly liquid and can be withdrawn at any point of time (savings account, liquid funds, dynamic fixed deposits etc.) and the remaining 40% to be invested in long term instruments like fixed deposits, recurring deposits, mutual funds (through SIPs), PPFs, MIS schemes of government. In any case, the longer is the duration of investments, the more the post workable life enjoyment will be. In summary, one should start early and therefore it is highly recommended that this habit should be developed before one reaches the age of 30. There is another dimension to the uncertainties of life – securing the life of dependents. This can be achieved through insurance – health as well as life. Many of us tend to see insurance as investment and are dissuaded by the low returns or non-returnability of the amount invested (as in the case of health insurance). Remember that insurance is a protection against the vicissitudes of life and therefore, one should see the long-term benefits in the form of coverage in case of any unwanted development in your life including death.
So, what drives investments and how one should plan through investments? The basic philosophy of wealth creation is that the return on savings or investments should normally be more than the risk-free rates which are essentially the returns offered by the government securities. Given the current returns on government bonds to be about 6.5% per annum, any return less than this will be a negative proposition. In this scenario, one can look at some risk-free options like Public Provident Fund, Monthly Income Scheme, National Savings Certificates, Kisan Vikas Patra which offer on an average 2% more than the risk-free rates. But the 2% return is only a nominal return and if we consider inflation and taxation in some of them, it may be a return less than 6.5%. But the major advantage of these instruments is the safety of principal and accumulated interest and hence the popularity. Given the fact that an average household in India is conservative so far as investment and savings is concerned, the above instruments account for most savings instruments in these households. Another option which is more lucrative so far as real returns are concerned i.e. post inflation and taxation are the investments in market linked instruments like shares, bonds, and mutual funds. The nominal returns from investments in shares and mutual funds assuming an investment horizon of 10 years may be around 11-15% and that in bonds around 9%. But these instruments come with their own set of risks and therefore one should be careful while making investments.
As a concluding remark, it is advisable that investment and savings should be a part of one’s daily chores. Identifying the goals and financial planning to achieve those goals are the pre-requisites for a happy and enjoyable life.