Recently, somebody asked us an interesting question.
“The Indian banking system is heading towards an imminent collapse. Should we get our money out of the bank and invest in gold?”
Before I answer this question on the bank-ability of our banks, I want to give you a little background of what is happening.
Ever since the lockdown began in March, the government has put in place a slew of relief measures to help boost the economy. One such measure was to ease the loan repayment obligation. Which means, individuals as well as companies that aren’t able to repay their existing loans, have been given an option to defer the payment by a total of six months (March, 2020 to August, 2020).
Now, when a borrower does not repay a loan for a prolonged period of time, it results in what is known as an NPA (Non-Performing Asset).
In simple terms, the loan you get from the bank is your liability, but for the bank it is an asset. And when borrowers default on loan installments, the loan becomes a non-performing asset. This is a loss for banks.
The negative impact of the pandemic has given rise to an increased number of borrowers deferring loan repayments. Not surprisingly, former RBI governor, Raghuram Rajan said recently, “The levels of NPA will be unprecedented six months from now.”
All this is what prompted our friend to ask us that question.
So what does this mean for our money that’s in the bank? Should we let it lie there? Or should we move it out? And if we move it out, where do we put it?
Let’s sort this out right away.
1. How much should I keep in my savings account?
It’s best not to have too high a balance in your savings account. ‘Balance’ includes any amount in a Fixed Deposit and Recurring Deposit linked to your savings account. Until last year, the amount that banks insured was 1 lakh. Which means, upto 1 lakh was safeguarded in your account. However, due to the many bank scams that occurred of late, this year’s budget increased the insured amount from 1 lakh to 5 lakhs. So now, upto 5 lakhs is safeguarded. Having said that, we recommend that you keep no higher than 2-3 lakhs in savings + FD + RD accounts put together. This is more than enough liquidity, ensuring that the rest of your funds can easily be set aside into avenues that give you greater returns.
2. If not the bank, then where should my money be invested?
Speaking of greater returns, where you invest depends on your financial goals and time horizon of your investment. If you’re investing for the long term, say anything more than 5-7 years, equity mutual funds, hybrid mutual funds and equity shares of companies are your best bets. Long term investments in these instruments are safe. For the short term, say 1-5 years, we recommend liquid mutual funds and debt mutual funds.
3. Isn’t gold a good investment avenue?
Next comes the question of gold. Over the last six months, gold prices have been on the rise. So it’s understandable that people would be drawn to it. But historically, over a thirty year period, the return on gold, much like real estate, has never even come close to the return on equity. Moreover, the rise and fall of gold is much too arbitrary to predict. Let’s say you do want to invest in gold, by all means go ahead. But be sure not to put in too much of your total investment portfolio in it. Having around 2-5% of your total portfolio value in gold is sufficient. And instead of opting for physical gold, which we’d say is the last option, go for sovereign gold bonds. These not only appreciate as the value of gold appreciates, but you also get a 2.5% per annum return on your investment.
All in all, businesses across the world have been impacted by COVID-19 and their results will show the impact. For now, the market is high. In the next few months, it might fall, mainly because many organizations will have suffered from under-performance and little or no profits, making their companies undesirable investment options. For now, gold prices are high. In the next few months, that might fall too.
Every now and then, the economy does go through ups and downs. Sometimes, the downs might be lower than ever. But stick around and you’ll see the bounce back soon enough. If you follow these few simple rules of safeguarding your money, you have absolutely no reason to worry, for the short term and the long term.
PS: You might recall the global financial crisis of 2008. If you’re curious to know more about it, go watch the film The Big Short, on Netflix over the weekend. It offers some brilliant insights into what really happened back then, and it’s a Christian Bale starrer. 🙂
