Post-note ban, equity a better investment avenue

Sanjay Sapre

Prime Minister Narendra Modi, in his televised address on November 8, announced demonetisation of Rs 500 and Rs 1,000 notes. The move was intended to tackle counterfeiting, nullify black money and curb funding of terrorism with fake notes.

It is said that there is no gain without some pain, so most Indians were out on the street standing in queue in front of banks to exchange/deposit/withdraw money from ATMs/ bank counters. According to the Reserve Bank of India, about Rs 14 lakh crore of currency in the Rs 500 and Rs 1,000 denomination is outstanding. 

Banks are now facing a problem of plenty as far as deposits are concerned. Prior to the move, bank deposits aggregated about Rs 100 lakh crore (as per RBI data). The flood of deposits has prompted some banks to reduce retail deposit rates by as much as 0.5 per cent. The drop has been much steeper for bulk deposits of Rs 1 crore and above. The highest retail deposit rate offered by the State Bank of India (SBI) is 7 per cent for 211 days to less than 1 year while it offers 6.5 per cent for a 5-10 year period. If you adjust this for tax and inflation, the returns will drop further. 

Here is how a drop in interest rates impacts investment planning. Say, you want to reach a goal of Rs 20 lakh after 10 years by saving a monthly amount. At a 7 per cent interest rate, you need to save Rs 11,488 every month for 10 years. Accordingly, you need to save Rs 12,143 per month for 10 years if interest rates drop by 1% to 6%. Thus, you would need an additional saving of Rs 655 every month (or Rs 7,860 per year or about Rs 80,000 over the 10 year period) owing to change in interest rates. In other words, you need to spare more money to meet your goals on time, if interest rates drop further. Alternately, you need to prolong your goals if your monthly savings remain the same.

It is, therefore, time to look at other modes of investment which not only have a lower tax incidence, but also help to ride over inflation. Equity is one such assets class. However, as an investment avenue, equity is chosen by a handful as most consider it to be risky.

But there are ways you can mitigate the risk of investing in equities. The first way is to invest via mutual funds. This helps in reducing the risk of stock selection as you invest via professional fund managers.

The second way is to invest for long term because the risk of investing in equities is more in short term than long term. There are various studies in the public domain which can prove this!

One of the best ways to invest in equity mutual funds is through systematic investment plans (SIPs) which are like your 'good EMI' - an investment and not an instalment. You can start a SIP for even Rs 500 per month. They help you to save regularly (month-on-month basis) for longer periods. They also have the potential to beat inflation over the long run and more importantly, they are tax-free, if held for more than 12 months. For example, equity funds* have provided 15.74 per cent and 12.42 per cent returns (tax-free) over the 5 and 10-year periods ended October 31, 2016.

If demonetisation has impacted your returns from traditional investments, it is time to look at other options and start a "good EMI" in equity mutual funds.

*Represented by the CRISIL-AMFI Equity Fund Performance Index (consists of 112 equity funds as per CRISIL ranking of September 30, 2016).

The author is president, Franklin Templeton Investments. The views expressed in this article are his own.