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To the glory of Mammon
In a span of less than five years, interest rates have nose-dived by about five per cent from the 11-12 levels. The signals from Mint Street in Mumbai, from the honchos of the Reserve Bank, indicate that the soft rate regime will continue. What is the outlook for persons in the middle-income group who want to have a nest egg when they hang up the boots?
Where do they go to for maximising the returns? The middle-class is averse to taking risks and would not like to play ducks and drakes with the hard-earned money in the bank. The bourse where the bulls and the bears battle it out is a strict no-no. It is like skating on thin ice. Not for them the Chit funds, which, according to sceptics, are better described as `cheat funds' because in many cases, they are administered by fly-by-night operators.
Though die-hard economists plead that interest rates move in tandem with inflation, they would agree that this is not quite borne out by the experience in the country in the fin de siecle and thereafter. Even as the money in your wallet fetches fewer goods, the savings stashed away in the bank yield less by way of interest. Bankers have a more constricted perspective in the matter. They view interest rates as a function of the risk. In other words, less risky investments fetch lower returns. If you are lured by a higher yield, watch out. Even your principal is in danger, warns the pinstriped banker. Need-based investment is hot, greed-based investment is not.
Academic discussions apart, the common investor is caught between the prospect of declining interest rates and spiralling inflation - and both are stark realities that he has to reconcile to. It is not enough to invest safely. One has to invest smartly.
In this series, we take a look at the various options available in the market so that you can choose a mix of investments that suits your risk profile. There are a few concepts one needs to understand before getting into the intricacies of investing smartly. Some of these are the net return and the real return on the investment, liquidity and safety. It would profit one to understand the import of opportunity cost and the power of compounding.
We will come to these in the next instalments.
MIDAS
(Address your questions relating to investment to smartinvestor@rediffmail.com or The Hindu, Airport Road, Vallakadavu, Thiruvananthapuram)
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