Proof-of-the-pudding of the statement ‘…the things are not completely rosy as the rate of return on some asset classes is expected to come down as well…‘ mentioned in the previous blog of this series – Impact of Demonetization on Individual’s Financial Goals is that the interest rates on bank deposits are already seeing a downtrend (refer News here)
This reduction in interest rate is going to impact the other market instruments like debt market funds (that shall see a sharp rise in their prices), fixed return instruments (rates shall come down significantly), small saving schemes like PPF/EPF (interest rates shall be lowered as these are market-linked).
The above shall in-turn impact the accumulation of funds for individual financial goals. Before looking at measures to be taken to counter this, let’s look at the impact on accumulation of fund with decreasing rate of return
Below are some of the measures that one can employ in low interest regime staring in the face of investors.
- Individuals with investable surplus could park the funds in either company fixed deposits (all of which have or are in the process of lowering their interest rates) or invest in long term debt mutual funds (that are expected to see a drop in yield thereby giving a good capital appreciation)
- Individuals without investable surplus but with regular monthly flow could opt for Recurring Deposits (refer Protecting future investments against falling interest rates blog for details on how RD can be used as an instrument to lock-in currently available higher rate of return for amount to be invested in future)
- For individuals with higher risk appetite, equity based mutual fund is expected to become darling of the market – given that there are expected to be very few avenues left for investing in future (for details, refer to next blog in this series – ‘Why Equity market should emerge as top investment destination post Demonetization?’
- Revisit asset allocation and move to tax efficient avenues to enhance the net returns
As Henry Ford said – ‘If you always do what you’ve always done, you’ll always get what you’ve always got.‘ – it’s thus time to invest differently to tide over the changes in post-demonetization era.