How safe is your capital?

Safety of capital will be on top of the financial priority list of a retired individual/senior citizen; and rightly so. With limited means of cash flows, safeguarding the capital, which would provide some income by way of interest, is important.

And yet, have the typical safe modes such as deposits offered you enough by way of return? Not so in recent years suggests this data from JP Morgan Asset Management. Across the Asian countries mentioned below, deposit rates managed to beat inflation and leave you with some surplus (returns mentioned below are deposit rates post yearly inflation) until 2007.


Source: Asia Outlook Q1 2013 report of JP Morgan Asset Management

However, since the start of the economic slowdown in 2008, most Asian countries have seen either lower interest rates and low growth or high inflation. As a result, investors in deposits have ‘negative real returns’. For India, rising prices were higher than deposit rates by 1.9%. Simply put, the interest income from deposits has not helped you keep pace with rising cost of goods. Net result, you would have had to dig in to your capital/savings to meet it. Now in a way, that too amounts to erosion of capital does it not? That means, while you may not lose your capital through risky investments, you lose it to a lethal force called inflation.

Way out?

But what choice do you have to combat this? Not much but here are a few suggestions: Ensure that you diversify your investments across a few products. Of course, you do not have to compromise on the quantum of risk you can take. If you want only debt products, look beyond bank deposits. There would be times when top-rated bonds and debentures come up with good rates. Be on the look-out and lock into them. Keep a demat account ready for this purpose as most bonds require you to have a demat account. Explore corporate deposits in credit worthy companies that are rated. Avoid going for unrated companies unless you have knowledge on the financials of such companies.

Ensure that instruments have high credit rating such as AAA before you invest either in bonds or deposits. Look for short-term debt mutual funds that have delivered not less than 7 per cent annually in the past and have at least a three-year record. Use systematic transfer plan in these options if you wish to get a steady payout.

Even with all this, there is no guarantee that you will successfully combat inflation. The fact is that if you had a sufficiently large corpus, you can simply park your money in instruments that earn 6-7 per cent and still not worry too much about erosion in capital.

But such a corpus could have been built only if you had invested in asset classes such as equities and real estate early on in life. If you have missed the bus, advice your children to invest early, invest systematically and in inflation-beating asset classes. They can always move their money later to deposits, when their risk-taking ability diminishes.

This article has been written by Vidya Bala of our financial advisory team.  Write to if you would like us to answer any of your questions or address a specific topic..

Leave a Comment