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What Is The Risk In Not Investing Your Savings?

Olga Robert

Uncertainty surrounding the economic state of the country has made many investors nervous about wealth creation. Volatility in the markets has also overwhelmed many causing them to hold their savings in cash, a conservative approach to protecting own's money.

How wise is it to shield your savings in a bank account?

The most recent CPI (consumer price index) numbers released for the month of October, should that retail inflation in the country has touched a 16-month high of 4.62 percent.

To over-simplify the calculations for better understanding, at the rate of 3.5 percent (being the average interest earned on savings deposits), and considering the TDS (tax deducted at source) on interests earned on savings bank accounts (at 10 percent), your returns, after tax deduction, would amount to an estimated 3.15 percent. This means that your money is growing 1.47 percent slower than the rate at which it is being devalued, proving that the risk of not doing anything exists despite avoiding the risk of investing in wealth-creating assets.

The interest rates on FDs (fixed deposits), another favourite investment product among Indians, are also currently very low and are expected to fall further after the recent CPI numbers.

Data released by the government for October showed that while CPI rose, core inflation fell to 3.44 percent, the lowest in the current inflation series. This goes to point out that the rise in inflation was mainly on account on an increase in food prices due higher than normal rainfall this monsoon that delayed harvest and even destroyed crops.

A rise in food prices due to shortage in supply rather than an increase in demand reflects weakness in the economy. Economists believe that considering the persistent weakens in the economy, RBI is unlikely to halt its interest rate cut spree in the next monetary policy review, continuing its focus on pushing growth.

High inflation at a time when interest rates are falling, is destroying the purchasing power of money at a faster rate by deploying the conservative risk-averse strategy. Purchasing power is the indication of how much a rupee is worth between two given periods and is often calculated based on inflation rates.

Your motive as an investor is always to beat inflation and to do so, you can invest in a mix of assets including equities (for the long term), mutual funds and gold.

Experts say that to make meaningful returns in equities, it could take three to five years, as a short period exposes your money to high volatility seen in the stock markets. Besides, it also depends on the stocks you pick. The returns made on a certain stock depends mainly on the performance of the underlying company and its earnings during the tenure of investment.

If you are risk-averse and prefer storing money in a savings account, gold is a good alternative. The yellow metal provides steady gains over a long period especially in times of global economic stress. However, knowing that gold is a non-interest yielding product, it is advised not to invest over 10 percent of your portfolio in it.

If investments overwhelm you, you could hire a financial planner to create a plan to grow your savings as per your earning capacity and money goals. Perform regular checks on "returns on investments" to see if it is beating inflation levels. You could talk to your financial planner to deploy a different investment strategy if it isn't.

Also Read:

Why You Should Invest In Sweep-In Fixed Deposits?

FDI Norms By JV And Wholly-Owned Subsidiary To Be Relaxed

Savings Account Vs Debt Funds: Which Is Better To Maintain Emergency Fund?