Where households can save their money

Madan Sabnavis | Updated on December 10, 2019 Published on December 09, 2019

Recent trends show a decent return in low-risk instruments. However, inflation has diminished the actual income on savings

The present environment, which is characterised by declining interest rates, stagnant economic growth, declining profitability of companies and high valuation of stocks, can leave the household confused when it comes to deploying money into savings. The pace of job creation has slowed, as has the rate of growth in incomes.

Obtaining high returns on savings is the goal of every household, and it goes with commensurate risk that may have to be considered. In this context, how have different avenues of savings fared?

The exercise undertaken here looks at the last five years and calculates the average returns over this period (see Table), where annual returns are summed and averaged instead of considering a CAGR, which ignores the returns in the interim period and looks at the two end points.

Hence, it is assumed that one holds on to the instrument for a year, and then moves out of the market and enters again at the new price, which can be an interest rate or value of index or price of product.




The Table thus gives the average returns on various savings options for the period 2014-15 to 2018-19. Alongside is also provided the standard deviation for the five set series which denotes volatility, meaning thereby that variation could be to this extent in any particular year.

This is important as it indicates that there can be an upside or downside, depending on the environment.

Long-term gains

The Table is quite interesting as it presents a fairly wide range of returns on various instruments of savings, from a -0.8 per cent for gold to 12.2 per cent for the stock market. This can be confusing for a household, as it is a hard choice to make. Stock markets give high returns over a five-year period, but if the savings horizon is less than this time horizon, there is both an upside and downside risk of 13.1 per cent deviation.

The RBI’s All India House Price Index is a theoretical option, as it tells how this market has fared. It cannot be strictly compared as rarely does anyone buy and sell houses every year. They are assets that would be held normally for a longer period of time, when they could yield high results.

But still, if a house becomes an annual investment, the downside is high with a high standard deviation. Therefore, it can be said that these two avenues would be medium- to long-term investments where there can be high gains made.

Avoidable avenues

Foreign currency and gold have been poor instruments of savings, and while the former is more theoretical as people rarely do trade in it (though derivatives are popular), the latter is normally held for the longer tenure and probably rarely sold. However, if gold was held for earning an income, the return would have been negative.

Also, in the case of forex, there are several factors which are at play — with RBI intervention being most common, either directly through purchase and sale of currency or indirectly through PSBs which can go against the market movements. Therefore, for individuals, to take a position in the futures market — which gets the gains of forex movements without actually dealing with the currency — is not a good avenue as it is necessary to understand the dynamics, which are closer to treasury desks than households.

Even in the case of gold, the movements have been quite volatile and returns have averaged negative in the last five years. It is only in FY20 that there has been a recovery in prices.

Therefore, while gold is held traditionally by households, the purpose is never to get annual returns, but rather to add to wealth or appreciation over a very long period of time, if at all one wants to liquidate the same. In fact, even within families who exchange gold during certain occasions like weddings, the transaction is decided in terms of quantity and rarely value.

Noteworthy returns

The choice then leans toward instruments with low risk (low standard deviation) and reasonable return, and here, the results are quite noteworthy. G-Secs and bank deposits had similar returns, with the latter surprisingly displaying higher volatility.

This is because banks have tended to revise the rates more often than the market re-priced the G-Secs. Also, while G-Sec yields have both increased and decreased based on market conditions, bank deposit rates have moved down continuously.

Small savings gave an inferior return relative to these instruments. This actually debunks the theory of bankers always arguing that they cannot lower their interest rates as small savings give higher returns. The one-year term deposit is less rewarding than a bank deposit. Normally, one compares bank deposit returns with those on PPF, which are superior due to the tax benefit. But the PPF also has a lock-in period with a limit on the amount of deposits that can be made in a year.

The surprise element is the AAA-rated bond in the market which gives a higher return of 8.3 per cent but also carries higher risk. The risk arises as these bonds not only reign at a spread above G-Secs, but tend to fluctuate more due to the risk factor. Hence they have ranged between 7.30-8.71 per cent.

Now, inflation for this period has averaged 4.8 per cent, which has to be subtracted from the above absolute returns to get the real return — ranging from 2.1 per cent to 3.3 per cent for deposits/debt and much higher, at above 7 per cent, for equity. For fixed-income earners, cumulative inflation is what matters, because an average inflation rate of 4.8 per cent for five years means cumulative inflation of 24 per cent, which actually erodes the value of the real principal that is being saved.

Quite clearly, when the effective income earned on savings gets impacted, the spending power too diminishes and affects aggregate consumption. This also presents a glum picture for deployment of funds, and it is no wonder that non-financial savings in the country have been declining over time.

The writer is Chief Economist, CARE Ratings. Views are personal

Published on December 09, 2019
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