The fortunate among us have the same income as last year. The less fortunate have either seen a significant decline in income or a job loss.
Adding to the woes are the current interest rate levels. Most banks offer interest rates between 5.5% and 6%. The consumer price inflation for June 2020 was just over 6%. Even if inflation were to come down in the near term, fixed deposits do not seem to offer decent returns. What should you do?
Uncertainty factor
When your income is stable, you are saving for the future to achieve goals such as buying a house or going on a vacation. But, when your income is uncertain, you may have to depend on your existing investments to support your living expenses. You have uncertain income if you have lost or run the risk of losing a significant portion of your current income.
All of us have an uncertainty threshold when it comes to taking decisions. This threshold is driven by our income levels, current wealth, intermediate goals and age. If your income is uncertain, you will be reluctant to take on investment risk. So, it is natural for you to turn to bank fixed deposits. Yet, bank deposits do not seem to offer attractive returns. What should you do?
Unfortunately, your investment choices may be limited. Equity is too volatile to fit into your investment portfolio. Real estate is a lumpy investment and illiquid too. Gold may seem pricey at the current levels. That leaves you with no choice but to look at bank deposits.
Cash flow stabiliser
You may have accumulated savings over the years. You are now forced to depend on these savings, although temporarily, to support your monthly expenses. You have two choices — either consume some amount of your investment each month or consume only the income from the investment. Clearly, the latter seems to be a better choice because your capital is preserved.
That narrows your choice to monthly income bank deposits. These are deposits that pay you monthly interest instead of an annual interest.
Typically, these deposits are meant for retirees who are looking to substitute active (salary) income with passive (investment) income.
Now, given the low interest rates, why should you still invest in bank deposits? You have two sources of cash flows. One is your income, and the other, your investments. Your income is currently uncertain. So, your investment should provide stability to balance your total cash flows. Deposits offer stable cash flows. So, the low interest rate you earn is a trade-off for the stability deposits provide for your financial well-being.
Conclusion
You may have significant equity investments. The high volatility in equity can be balanced by bank deposits, which is a stable-income asset.
So, whether your income levels are uncertain or not, you may have to invest in bank deposits. If low interest rate levels are here to stay for a while (if not for long), it is time you look at bank deposits as a stabiliser for your otherwise volatile cash flows or for your portfolio that is heavily invested in equity. The alternative is to keep the money at home or in savings account, both of which are less attractive than bank deposits.
Banks understand this well. Perhaps, that explains why they did not waste time before cutting interest rates when RBI lowered repo rate from 5.15% this February to 4.4% in March and then to 4% in May.
(The author offers training programmes for individuals to manage their personal investments)
