It’s that time of the year when most families across the country are in joyous celebration with friends/relatives at the start of the New Year, but are also drawing up plans on how to save and grow their financial savings in 2020 and beyond. And financial planning for most middle-class families is not easy at this juncture, given that the key stock market index, BSE Sensex at 41, 464 levels on Friday's closing, is not too far from its all-time high of 41,810. In addition, fixed deposit rates with a tenure of one year or more at most public and private sector banks have dropped nearly 100 basis points or 1% during the calendar year 2019.
Families while deciding their choice of investments to be made for 2020 have to look at both short-term and long-term financial planning requirements. Typically, 30-50% of a family’s savings in the New Year is allocated to fixed deposits or debt schemes of mutual funds, point out financial planners.
Dhirendra Kumar, chief executive, Value Research, a well-known firm for tracking mutual funds and broader financial markets, said, “Every family needs to look at their financial goals and targets, and accordingly divide their savings into debt, equity and allied instruments, to achieve the best returns over the long term.”
Also, most banks, PSU and leading private sector banks offer their FD holders of earning interest on a monthly or quarterly basis. In addition, most banks offer senior citizens (60 years or more) half percent more.
Fixed deposit interest rates of key banks for non-seniors (tenure of 1 year)
SBI = 6.25%
Corporation Bank = 6.6%
HDFC Bank = 6.3%
Source: Respective bank web sites
Debt schemes of mutual funds are also becoming popular, especially among younger families/savers, as these schemes benefit from changes in the interest rate environment and resulting values of the underlying bond prices. And with the RBI reducing interest rates on several occasions in the calendar year 2019, debt schemes of several mutual funds have performed better than the traditional fixed deposit schemes offered by banks over the past one year.
Debt schemes of mutual funds are currently offering superior returns vis-à-vis traditional bank fixed deposit schemes, adds Dhirendra Kumar of Value Research. He also points out that investors need to understand the risk profile of each debt scheme of a mutual fund before investing and they could invest a fixed sum; of say Rs 3,000 or Rs 5,000 or Rs 10,000 per month over several years, in a bid to get the best returns over the long term.
The returns of various debt schemes of mutual funds over the last one year –
HDFC Floating Rate Debt Fund 8.7%
ICICI Pru All Seasons Bond Fund 10.5%
Axis Dynamic Bond Fund 11.1%
Source: Data as on Friday, January 3, 2020, from Value research web site
Investing in the stock market
Stock market investments, either directly or through equity schemes of mutual funds, are ideally suited for meeting long term financial commitments of a family – buying a home or paying for child/children’s engineering or medical college fees or for providing a corpus for the retirement years.
The BSE Sensex index has risen nearly 15% over the past one year to its Friday’s closing of 41,464 and investor sentiment has been buoyant thanks to the earlier corporate tax cuts announced by the central government.
Also, investor expectations that the steps were taken by the RBI to lower interest rates would help to bring about a recovery in the local economy over the next 6-9 months and it has helped to keep key stock indices at record levels.
In addition, signs of easing of trade tensions between the two largest global economies; USA and China, have boosted investor sentiment on Dalal Street.
And this has resulted in the BSE Sensex Index at 41,464, trades at very high valuations – a key valuation matrix P /E – price-to-earnings ratio – of nearly 26.6 times. It’s no surprise that analysts and research houses tracking the local stock market remain cautious for several reasons. For instance, in the Indian stock market, several key blue-chip stocks like Reliance Industries, TCS, HDFC Bank and Hindustan Unilever (HUL), amongst others, are trading close to their lifetime highs.
Analysts also highlight that the local stock market is close to an all-time high at a time when the economy’s growth (GDP) has slowed considerably to 4.5% year-on-year in the September 2019 quarter. In addition, another visible sign of the slowdown has been sluggish consumer spending patterns. Echoing a similar view, Amnish Aggarwal, head of Research, Prabhudas Lilladher, said, “Investors need to be careful as the stock market and the broader economy is moving in the opposite direction.”
As a result, experts are increasingly advocating that investors should not make large lump sum investments in the equity market, given the high risk. And a more prudent strategy would be to invest a certain small amount every month, say Rs 3,000 or Rs 5,000 or Rs 10,000 or more via Systematic Investment Plans (SIP) in the equity schemes of mutual funds for several years – 5 or 10 or even 20 years, depending on the long term financial goals of the family.
The above strategy would help to balance out the risk given the inherent volatility of the stock market.
Returns offered by equity schemes over three years
Kotak Standard Multicap Fund – 15.8%
SBI Focussed Equity Fund – 17.3%
DSP Equity Fund – 14.9%
Source: Data as on Friday, January 3, 2020 from Value research web site.
Clearly, every family would need to work on a financial plan for 2020 that suits them, but experts advocate a mix of both debt and equity instruments, in a bid to optimize returns over the long term.
(The writer is a financial journalist)
