Set suitable risk appetite for savings

With integration of financial markets on the bedrock of technological innovations, investors in India too have a wide choice to channelise their savings. It is estimated that 60% of financial savings are with banks. The post office savings, life insurance, bonds, debentures, contributory provident fund, public provident fund, retirement corpus, non- banking finance companies, equity/mutual funds, corporate fixed deposits and a host of other attractive savings schemes form the remaining part of the financial system

The taxability of products differs from one another but the more important driving point is the perceived risk and return that decides the flow of funds into various savings products. The purpose is to use money traditionally as store of value for future exigencies.

Out of the Gross Domestic Savings (GDS) of 30.1% of GDP in FY13, 21.9 per cent flows from household sector, of which only 7.1% of GDP goes to financial savings products and the rest goes into physical assets like real estate and gold. The crux of the issue for individuals in choosing a savings product is the return and safety of funds which can be known as ‘Risk Adjusted Return (RAR)’. But the RAR is perceived differently by different age group of people. It is more related to the age profile and perceived risk and hierarchy of needs. Higher the age profile, higher the perceived risk and lower is the risk appetite and lower is the RAR. Let us discuss how one chooses the investment options.

• Perceived risk adjusted return

Logically, the higher the risk, the better could be the return. In this league, in the last ten years, the capital market’s benchmark index, BSE Sensex and NSE Nifty has provided a return of 15 % and 16 % respectively compared to the average inflation of 7 per cent. But very few perceive capital market as a safe source and hence choose safer avenues such as bank deposits, insurance or mutual funds. Some choose life insurance as they perceive protection against natural death as more important and settle for lower rate of return on their savings.

The youngsters, having higher risk appetite sometimes opt for more exotic financial products such as besides equity, debt markets, they embark on futures and options for better returns. But the technicality of investing in them needs deeper knowledge and continued access to market dynamics. When we look at the bank deposits, the returns in long term are well aligned above the inflation rates and hence considered more safe and prudent.

• Liquidity considerations

Liquidity is another important factor in choosing a financial product for channelising savings. Ready accessibility of funds becomes another determinant in deciding priorities. In order of liquidity, savings, fixed deposits of banks can be considered more liquid than equity, mutual funds or corporate bonds. Hence, in determining merits in choosing products, its accessibility is taken into consideration.

With the advent of technology, internet banking, mobile banking and ATMs provide easy accessibility. A savings bank account in banks is the most accessible form that comes handy in times of emergency. Investment in real estate and gold is often considered less liquid when seen in comparison to the bank deposits. Hence, only a small portion is invested in less liquid financial assets (products). Thus, the higher the liquidity, lower is the yield.

• Safety of funds

The overriding consideration is perceived safety and security of funds. Normally, financial institutions and banks owned by central/state governments are considered safer and more preferred though ownership per se may not make any difference. All banks operating under the same regulatory dispensation can be considered equally safe but the perceptions of the consumers are different. The track record of performance of various intermediaries in the financial sector in India clearly shows that the quality of regulation ensures safety of funds. The only caution should be against fly by night operators who operate ponzi schemes offering disproportionate and unsustainable rate of returns.

• Needs of consumers

In choosing savings products while RAR, liquidity, safety are important, the individual requirement, age, specific personal circumstances needs to be kept in view. Entrepreneurs, farmers, senior citizens, youngsters, middle age, students and divergent class of savings community get to access to different streams of funds. The funds flow needs to be customised to meet such requirements.

• Conclusion

Thus every prudent investor has to take a 360 degree view of a financial product and evolve a combination of portfolio and keep shuffling it with change in priorities. During the life time of individuals, the resources and needs are dynamic and all factors have to be considered in taking a view. While savings habit should become an integral part of every individual to help the economy to plough back public savings into investments of the country, it is necessary to take holistic informed decisions in using savings products. History is witness that bank deposits are the best form of savings in India but while fixing individual ‘risk appetite’, it is necessary to evaluate all options is in terms of safety and returns so as to optimise perceived returns.