With several banks floundering of late and the inherent risks of keeping one’s cash at home, depositors are a worried lot. Where do we invest our money?
The recent crisis at Punjab and Maharashtra Co-operative Bank (PMC Bank) has created panic among the general public on the safety of their bank deposits, and rightly so. Not only has the RBI suspended the Bank’s Board and sacked its managing director, depositors could withdraw a maximum of Rs 25,000 only out of the total balance across all their accounts (first it was just Rs 1,000, which was later extended to '10,000 and now RBI has made it Rs 25,000).
This is not the first such instance. Time and again, cooperative banks like Kapol Co-operative Bank, Rupee Co-operative Bank, CKP Co-operative Bank and the Maratha Sahakari Bank have duped gullible depositors, who are attracted by the higher interest rates they offer on term deposits. Sadly, many are still under RBI restrictions, which means that the depositors’ money continues to remain locked.
Says Pankaaj Maalde, a certified financial planner, “While the government has been ensuring that nationalised banks don’t fail, nothing is being done in the case of co-operative banks where politicians hold board positions and huge loans are assigned on political connections without adequate security. Worse, the auditors don’t highlight financials if they find anything amiss.” Naturally, financial experts advise against putting all your hard earned money in cooperative banks, even if they seem to offer better rates of interest over nationalised banks.
In a quest to earn more, many depositors are also unaware that as per the RBI guidelines, each depositor is insured only upto Rs 1 lakh (for both principal and interest) across all accounts in one bank. This basically means that if you have a savings account and fixed deposits and the bank goes under, all your savings are gone. So it’s always a good idea to invest in different banks and diversify your investments.
Experts further caution that while fixed deposits are an attractive investment option, they are not ideal for creating long term wealth and cannot match inflation, which makes debt instruments such as debt mutual funds, small savings schemes and tax free bonds a better option.
Senior citizens can avail from a range of investment options such as bank fixed deposits, recurring deposits, post office FDs and RDs, Senior Citizens’ Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), National Pension System (NPS), and debt mutual funds.
Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as government bonds, corporate bonds etc of different time horizons. Generally, debt securities have a fixed maturity date and pay a fixed rate of interest.
Debt securities are also assigned a ‘credit rating’, which helps assess the ability of the issuer of the securities / bonds to pay back their debt, over a certain period of time. These ratings are issued by independent rating organisations such as CARE, CRISIL, FITCH, Brickwork and ICRA. Ratings are one amongst various criteria used by Fund houses to evaluate the credit worthiness of issuers of fixed income securities.
“Senior citizens should first look at safety of their capital and then post tax returns on their investments. Senior Citizens’ Saving Scheme (SCSS) and the Pradhan Mantri Vaya Vandana Yojana of Life Insurance Corporation of India are good avenues,” recommends Maalde.
As for the general public, a person should invest based on his/her age, financial goals, timeframe and risk appetite. A combination of debt and equity mutual funds is often recommended for wealth creation.
According to Anil Rego, chief executive officer of Right Horizons, “Investors need to be careful as even debt instruments carry a default risk and the loss may not be fully recoverable. So if you are investing in corporate deposits or non-convertible debentures of a company, then you should study that company, look at its financials, credit rating, business environment it operates in and not just get carried away by the interest rate they are offering. Secondly, it’s a good idea to diversify even in debt instruments.”
NCDs are a debt instrument with a fixed tenure and people who invest in these receive regular interest at a certain rate.
Growing one’s money is one thing, but keeping it safe is paramount. When it comes to your hard-earned savings, the adage ‘Better be safe than sorry’ rings absolutely true!
AJAY GANDHI,
CA, founder trustee of Manthan Foundation
Their business is to borrow your money and invest in loans to others. They make profits by the difference between interest they earn and pay. Banks are also like other businesses. Some run well and others poorly. Some are ethical and others not always so. Some have good corporate governance practices and others do not have. Some are transparent and truthful about their accounts and some are not. Some use your money to give loans to deserving companies and others, under collateral but not all do — like PMB, which gave loans to delinquent companies having a relationship with the bank management.
The reputed banks end up having enough assets, low bad debts and remain sound. They are capable of returning money when needed. The non-reputed ones can get into a tight position and can lose their ability to repay their depositors. If you invest in such banks, you run a risk of losing it.
It is important for you to understand the business you are lending your money to and weigh your risks. No investment is risk-free. It is just that the risk varies with the kind of investment you make. So, be aware, learn about the risks and make judicious investments. Larged public and private banks have better business models, better governance and more transparency and regulation. This is only a relative statement in comparison with smaller cooperative banks which have less regulation by RBI or less stringent corporate governance. Also know that your deposits of up to 1 lakh are covered by insurance and in case a bank goes down, up to 1 lakh would be paid by the insurance company.
