Will low deposit rates push savers to the stockmarket?

ISUUE

Asset allocation is the key

HEMANT RUSTAGI
Investment Analyst

For a significant part of the current stock market rally, most investors "" especially retail "" were watching from the sidelines with awe and fear.

While they were overawed by the sharp rise, the fear was a result of the unpleasant experiences of the past.

As a result, even the mystique that generally surrounds the stock markets failed to attract them.

This, in spite of the fact that the interest rates on bank deposits are at the lowest levels and are unlikely to move up at least in the foreseeable future.

The question, then, is, will this awe and fear give way to greed? Are we going to witness a re-run of events that unfolded in the past?

While there are definite signs of increased retail participation in the stock market, we are far witnessing a frenzy that could give bankers a sleepless night.

The success of some of the IPOs in the year 2003 and the subsequent surge in their stock prices has resulted in a revival of sorts for the primary market.

Considering that most investors in India have a tendency to begin investing in equities through an IPO, this was not surprising.

Also, investors some how do not mind taking out money from the bank account for investing in the IPOs.

There are a large number of quality IPOs lined up in 2004. It is estimated that these IPOs would mop up around Rs 10,000 crore from the market. As a result, we may see some money moving out of the banks and finding its way into the stock market.

However, there is a word of caution for those wishing to rush into equity market straight from the safety of bank deposits.

It is high time they start looking at equity as an asset class in the right perspective rather than treating it as their passport to overnight riches.

They will do well to remember that the best way to invest in equity is by understanding one's needs, time horizon as well as the risk profile and avoid the tendency of investing all their money in one asset class.

The key is to do a proper asset allocation with the help of an advisor.

It is also important to understand that investing in equities is a process that requires understanding of the associated risk as well as a long term view and investing at a pre-determined interval.

This approach will not only allow them to weather stock market cycles successfully but also curb their instincts to time the market. I strongly believe that mutual funds are the most ideal vehicle to experience investing in equities.

Remember, there will always be bull and bear markets, interest rates will rise and fall and it will always be nearly impossible to predict the economic scenario right round the corner.

The best one can do is to take an informed and sensible approach by investing for the long term and earn a decent real rate of return which banks do not offer.

The Indian stock markets are on a roll. The Bombay Stock Exchange Sensex has gone up by more than 80 per cent since the start of 2003 and continues its march upwards.

And unlike the last bull run, this rally has been quite broad-based, spurred by a host of factors.

Bank deposits will grow

A S KHURANA
GM, Bank of Baroda

Traditionally Indians are savings-oriented. They have been keeping their money in the banks in the form of deposits. For them the word 'bank' is synonyms with 'trust'. It is like a brand.

There is a tendency to come to the bank and open an account even for a minor child. They perceive it as a risk-free institution.

In India there are a number of avenues available for the investors ,viz. fixed deposits with banks and post office, fixed deposits with companies, PSU bonds, income-oriented and growth-oriented units, non-convertible debenture of private sector, mutual funds, small saving schemes like PPF/NSC/IVP etc.

However there are certain distinct advantages that the banks deposits enjoy vis-a-vis other avenues such as high liquidity, loan facility, deposit insurance up to Rs 1 lakh, special rate for senior citizens etc.

Even though the interest rates have bottomed out over the past two years , there has also been a sizeable growth in bank deposits.

The Indian economy is looking up and there is a feel good-factor pervading. The stock market is bullish and inflows will be very high into the equity sector as investments yield very high returns in a boom.

But the high risk involved due to the volatility and sensitivity of the stock market will keep a majority of retail investors away from it.

Despite technical advancements such as dematerialisation, online and screen-based trading etc, these investments are made by a selected small segment in cities and towns. Still a majority of rural population rely on banking products for their savings and investments.

In the case of government-sponsored small savings schemes, the Centre has started slashing returns on account of the high interest-cost burden.

Still their rates are attractive and they are competing with bank deposits on account of tax incentives on a continuous basis.

Postal savings schemes could be a tough competitor to banks if the service improves and the Postal Department becomes customer savvy. It also have broader reach as there are post offices in every nook & corner of the country.

They also offer higher rate of interest. However, the biggest drawback of most of these small savings schemes is that they are not liquid.

As long as the market is good, economic indicators are positive, FII inflows are persistent, the inflows into segments such as equity, money market and mutual funds will probably overtake the inflow into bank deposits.

But as soon as the market becomes dicey the outflows will be faster and it will come back to bank deposits, which is a consistent performer.

And if the US Treasury bills harden, there is no choice for the countries but to align with the global position. In such a case, the interest rates will rise and debt funds and their valuations will come under pressure.

Banks will offer higher rates of interest on deposits and then the bank deposits will grow automatically. The biggest USP and the silver lining for the banks is the payment mechanism, which no other non-banking finance company can offer.

Therefore, even though the other markets will grow under a booming economy, the inflow of bank deposits will continue to be substantial and there will be a consistent growth in bank deposits.