- 1 Fixed deposits remain the preferred investment tool for countless Indians, especially for risk-averse investors like senior citizens and retirees
- 2 (1) Avoid entire FD exposure in a single bank
- 3 (2) Use FD laddering
- 4 (3) Review your credit score periodically
- 5 (4) Diversify to beat market volatility
- 6 (5) Understand even debt investments are not always safe
Fixed deposits remain the preferred investment tool for countless Indians, especially for risk-averse investors like senior citizens and retirees
Analysing financial events and practices of the past can help us improve our financial habits in the future. The calendar year 2019 has left a trail of learnings for all of us to ponder upon – things that can lead us to making wiser financial decisions in 2020 and beyond. I’ve highlighted a few of such money lessons that 2019 taught us to ensure we enter another monumental year on a stronger financial footing.
(1) Avoid entire FD exposure in a single bank
The non-performing assets (NPA) and liquidity crises continued to make big news in 2019. For example, the central bank imposed certain operational restrictions on a Mumbai-headquartered multi-state co-operative bank which led to a severe financial crisis for its investors and account holders. The episode also made us talk about the Deposit Insurance and Credit Guarantee Corporation, a Reserve Bank of India subsidiary, which provides an insurance cover of up to Rs. 1 lakh on deposits in case a bank fails.
So, the learnings for all of us should be to remain cautious about investing only in regional and co-operative banks (especially when there is no dearth of nationalised commercial banks in the country), understand the risks involved in doing so and rather spread out our fixed deposits to multiple banks to avoid putting our entire savings at risk. You may also want to limit your FD amount to Rs. 1 lakh per bank for additional deposit security.
(2) Use FD laddering
Fixed deposits remain the preferred investment tool for countless Indians, especially for risk-averse investors like senior citizens and retirees. However, the deposit rates have seen a fall in 2019 though not completely in line with the RBI cutting its repo rate by 135 basis points in the year alone. With current rates ranging between 6-7% for FDs with a tenure of more than 1 year, investors will be well-advised to implement the FD laddering strategy to garner better returns in the future.
Under the FD laddering strategy, you can distribute your FDs in equal amounts with regular maturity gaps instead of investing your entire fund in a single FD account. For example, suppose you want to invest Rs 5 lakh. But instead of investing it all in a single FD, divide it into five different FDs each amounting to Rs. 1 lakh with different maturities like 1-year, 2-years, 3-years, 4-years and 5-years, and reinvest every deposit on maturity following a 5-year cycle. This will create an investment loop that will help in averaging out any interest rate fluctuation in the long-term while garnering better returns if rates increase in the future. Also, you can avoid disturbing your entire investment corpus in the face of a financial emergency if your requirement can be met with liquidating just one FD.
Lastly, investors would be well-advised to also diversify their investments into other instruments like Public Provident Fund, Senior Citizens Savings Schemes, corporate deposits, post office timed deposits, National Savings Certificate, Sukanya Samriddhi Yojana, etc. to prevent lowering FD rates from impacting their journey to achieve their financial goals on time.
(3) Review your credit score periodically
Following a directive by the RBI earlier in the year, banks have started linking their lending rates for retail loans to external benchmarks like the repo rate. However, many lenders are still reserving the best rates for borrowers having a good credit score. As such, borrowers would be well-advised to review their credit scores from time to time and take corrective measures if their score sees a fall to continue availing the best repayment rates on their loans. These corrective measures could be ensuring all their existing loans (like credit card dues, car loan EMIs, etc.) are paid in full on time, keeping their Credit Utilisation Ratio for revolving credit facilities like a credit card under the 30% mark and correcting errors in their credit report, if any.
(4) Diversify to beat market volatility
The equity market was quite volatile in 2019. Mid-cap and small-cap stocks, especially, didn’t perform well in comparison to the large-cap stocks. So, many investors complained about the subdued or negative returns from the mid-cap schemes in mutual funds. Some investors even stopped their Systematic Investment Plans in mid-cap schemes fearing losses or lower returns in the future. As such, when investing money in equity-oriented funds or direct equities in 2020, you’ll be well-advised not to put your entire fund in one category.
Diversify your investment not just across small, mid, and large-cap funds and but also into various investment instruments. The market may not have met certain investors’ expectations in 2019, but it may bounce back in 2020. So, stopping SIPs is not advisable unless your risk appetite is extremely low. That being said, it’s always better to keep a long to very long-term investment horizon when it comes to equity investments.
(5) Understand even debt investments are not always safe
The NAVs of many debt mutual funds witnessed a steep fall in 2019 following an interest repayment-triggered crisis faced by a major non-banking financial company in whose securities the debt funds had exposure. The question is, how can you avoid such losses?
To do so, make it a point to scrutinise the portfolio structure of every debt fund you wish to invest in and ensure that you select a fund which is highly diversified and doesn’t have high exposure to potentially high-risk securities. In 2020, focus on adequate diversification of your investments across different debt schemes to avoid risk from a specific fund.
These pointers will help you in making smart financial decisions in 2020. The bottom line is every investment you make should be strictly in line with your financial goals and risk appetite. Don’t hesitate to consult your financial advisor to chalk out a pragmatic investment strategy if you are unsure about your financial moves.