Indian investors turn risk-averse in 2019, investments rise in FDs

The post-tax return from most fixed-income instruments marginally beats, or lags behind, the inflation rate

Indian investors turned more risk-averse in their investment choices in 2019 compared to the previous year, according to a survey conducted by UBS Global Research. The third urban consumer survey covering 1,064 participants found that respondents’ ownership of lower-volatility instruments like bank fixed deposits (FDs), post office savings schemes and pension plans rose. On the other hand, their ownership of riskier products like shares and equity, balanced, and debt mutual funds fell. 

Black swan events tend to trigger a flight to safety. “After the IL&FS episode and the subsequent challenges in the shadow banking space, there was a flight of capital towards perceived safe havens,” says Saurav Basu, head of wealth management, Tata Capital Financial Services.

Slowing economic growth, rising job uncertainty, low salary growth, and difficulty in accessing borrowed capital have turned households more conservative. “When investors perceive greater uncertainty around their jobs and income growth, they are less willing to take risks with their investments,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

In 2019, select large-caps did well, but the downturn in the broader markets continued. Many investors, who had started their systematic investment plans (SIPs) in mid- and small-cap funds in 2017 or 2018 have had a poor experience. “Many such investors may have stopped their SIPs or even pulled money out,” says Sousthav Chakrabarty, co-founder and chief executive officer, Capital Quotient.

With many debt funds getting hit by delays and defaults in repayment, investor confidence in these funds was dented, prompting many to exit.  

Higher investment in bank FDs, says Basu, is natural in such an environment, since they are regarded as the safest investment option by traditional investors. Inflows into small savings schemes also rose. The total outstanding in these schemes was up 15.4 per cent year-on-year in August 2019 (Source: RBI bulletin, February 2020). Declining interest rates got transmitted to bank FD rates, but small-savings rates did not come down by the same extent. “Many investors have substituted bank FDs with post-office schemes,” says Dhawan. Investment flows into gold have risen with investors trying to benefit from the bull run in the yellow metal (one-year return is 30.33 per cent) and also because it is regarded as a safe haven.

Investors who have tilted their portfolios towards fixed income should remember that these instruments will enable them to safeguard their capital, but are not suited for wealth creation over the long term. Consumer price index (CPI) based inflation has averaged 5.87 per cent over the past 10 years. “Over a longer period, after you take taxation into account, fixed-income instruments will only marginally beat inflation, or even lag behind,” says Chakrabarty. Fixed-income instruments also come with reinvestment risk—the lack of surety about the rate you will get when you reinvest your money. And while many small-saving schemes offer higher returns, they come with a lock-in. 

Build your portfolio using a variety of instruments, so that poor performance in one part is balanced by good performance in another. Avoid going overweight on one asset class when it is doing well, and exiting it when it hits a lean patch.  Also, segregate long-term investments, of more than seven years, from medium- and short-term ones. Put that money in equity mutual funds using the SIP route to meet longer-term goals. Do not stop these investments even amid adverse conditions.

Ultra-conservative investors may put their longer-term money in fixed-income instruments. Interest generated by them can be put into the SIP of a Nifty-based index fund. This will ensure safety of principal and still allow these investors to earn market-linked returns.