Losing Interest?

January 23, 2007

By Mohan

News: Costlier food, energy drive inflation to 2-year high

Inflation allows you to live in a more expensive neigbourhood without moving. – Anon

In good old days, people used to save for the rainy day from surplus money on hand using many avenues. In present times, banks are one of the primary money managers. By saving in debt instruments or which protect your capital, one manages to “save” money for the future. But is that still true? What if somebody tells you that your savings bank is actually losing money? This post is sure to get you interested in Interest and Investing!

The primary reason for “saving” – be it a savings account or a fixed deposit in banks, post offices etc., is to not only protect the money from physical vagaries (like theft, natural calamities etc.) but from an unknown hand called Inflation.

What is inflation? Simply put, this is the purchasing power of money getting eroded. You may have heard from your father, grandfather or your uncle that in “those” days Rice was 2 Rupees per Kg. But today it is at 12 Rupees. What happened meanwhile and why did this happen? The answer is inflation. In technical terms inflation is too much money going behind too few goods like the BDA auctions sites in Bangalore – the highest bidder gets the site.

The main reason banks would need to give your INTEREST, is to primarily BEAT this inflation so that your purchasing power of the money at least remains the same year after year.

Now let us apply this theory to our salaried professional who is a hard core tax paying person. He has 1000 Rupees in savings account. The published inflation is at 6%. The bank pays 3.5% on your savings account. So our man is loosing 6 minus 3.5%, which means year on year, he is losing 2.5%. His money is diminishing despite a national banks capital protected account!!!

Want to move that to a fixed deposit? Well they yield 8% for an year. Remove the 6% from 8%, simple arithmetic would give you 2% profit. IS IT SO…what about the income tax? If you are like most middle class in the 30% + bracket, your numbers are:
Bank interest = 8% = Rs. 800 ( for the Rs. 10,000 invested)
Income tax on 800 Rs. @ 30% is Rs. 240

What you are left with is Rs. 560 or 5.6%
Now remove the inflation @ 6%
Your returns are -0.4%!!

The same holds true for most fixed tenure instruments, which are expected to protect the capital of the investor.

If earning money is difficult, protecting it is much more tougher, isn’t it?

18 Responses to “Losing Interest?”


  1. Very good post. It has the social concern in what so ever way!!
    Its scary to read about all these.
    Probably you are best fit for an advisor, financial, social or what ever. Advisors need not have to practice when they preach🙂

    Bellur, your blog consolidation seems to be a hit idea!
    Vijay, another post for BB.

  2. usha Says:

    mohan saar..
    Neev yen kelsa heLidroo madteeni, ee lekka maathra heLbedi saar… thalene oDalla😉

    sd/- JaNesha🙂

    Super post sir, adakke i dont believe in saving anything be it leave in office or money in bank ………..😉 ninne nennege , naLey naLege, indu nammadhe.


  3. Ushakka… savings ilde ashtondu dodda mane ishTu chikka vayasalle kaTTisidri.. idara secret enu heLakka…..
    sakkataagide comment maatra🙂

  4. some body Says:

    this is a good post and a new topic here.

    this is a person who writes great personal finance articles – most of his articles have a usa slant, so i wonder how much you guys in india will benefit…

    – s.b.

  5. M O H A N Says:

    Veena,
    Thnx for the comments. Definetly practising what is being preached is very tough. But this is what am finding out from some smal maths. Hope it helps somebody out there too.

    Janesha
    Pls do take responsibility of your future needs, just hard work is not worth the modern times alwa usha

    Somebody,
    Thnx for the link, there is a great difference between the US of A and india but the basic tenets hold good still.

  6. usha Says:

    Veena

    Very simple i followed my fathers and my father in law’s practice, all round investment is what their belief was and is ,includes investment in life insurance and covers life risk, term end benefits as a portion, shares investment as risked high benefit portion, home consturction with home loan (interest exemption) benefits. Investment in agriculture as that market is going to pick up in 15 years , yella tinnovre irthare … beLeyovru yaru iralla antha😉 Mainly we could save becoz we cutdown on Unnecessary shopping and spending.

  7. usha Says:

    mohan

    True, Eegina generation ge hard work ondhe alla, smart work kooda madbeku, jothege path kooda chennagi yochisi ariskobeku. that will help for future needs, life style aadashtu simple itkondre ella accomdate madakke saadhya idhe. Gatti manas madbeku ashte .

  8. usha Says:

    Of course i treat savings as investment for future

  9. M O H A N Says:

    Dear usha,
    I think you have mastered the art of survival very nicely. In fact you have built your pyramid of investment too understanding the underlaying risks.

    You have got the vision and gone one step beyond in agriculture – kindly do share with mortals like me as this is something new and avenues open to “reserve” future “meals”

    cheers
    mohan!


  10. ‘Mutual funds are ….. to Market Risks’ anno tara ittu comments gaLa surimaLe…
    Murali Partha avaru maataDodu keLidde, eega ade tone bere yavaru ! sakkat ushakka… full impressed, artha aaytu swalpa swalpa. Agriculture nalli invest maadodu maatra hosadu..
    eega jeevanadalli kaNNu bidthidivi, but neverthless to say.. the money I invested 5 years back on anything is helping me now though the investment is small…
    One penny saved is One Penny earned anno book togoNde, odokke aagilla .. Well said about savings & investments.

    Mohan, enri idu pyramid? Nature food chain pyramid gottu idu yaavdu ?

  11. rk Says:

    veena,
    good comparison wrt ‘‘Mutual funds are ….. to Market Risks’!

    most insurance companies now sell “happy products,” and try hard to remove the gloom associated with it. unlike MFs and banking, insurance was never about facts and figures. there was an emotional connect, but a sad one. only, the attempt is to now tell people they will be able to continue living well even in the face of unpredictability; mortality is only the extreme end of the surprises life springs on you.

    the humour/emotion is used to create awareness. the market has changed over the last two years and the products on offer have to match the distinct consumer segments. the youth, and there are those who have arrived in life, and each group approaches financial services differently.

    the humour employed in mutual fund ads is an attempt to get around the jargon that goes with the product. mutual funds started gaining appeal about two years ago in the country, and advertising has helped generate much interest.

    however, the hurriedly mentioned warning (which is mandatory) at the end of an ad that MFs are subject to market risks is a bit of a dampener. at the end of a nice, happy ad, telling people that so-in-your-face might put them off.

  12. M O H A N Says:

    Veena

    Very similar to food chain pyramids, investment pyramids are constructed too.

    A portfolio strategy that allocates assets according to the relative safety and soundness of investments. The bottom of the pyramid is comprised of low-risk investments, the mid-portion is composed of growth investments and the top is speculative investments.

    Your savings bank or cash on hand is the bottom tier, investments in bonds,close ended MF etc is middle tier, Stocks / shares are speculative instruments.

    Hope you see the light at the end of the tunnel🙂


  13. Mohan, Thanks for the information. Well.. that was very easy to understand.
    When we had our session last year, they said.. 20s is to earn a lot of money, 30’s to multiply it & 40s to 50’s to returns antha…
    This pyramid is a good one, Is the inverted pyramid okay for youngesters ? Just a Q…. of course, ideal case is to have a broader base.
    Ideally, a guy who has started his IT career at the age of 22 & have got some long term onsite chance for few years & then get married little late to a spouse who is well settled & need not spend on the spouse instead have some earnings back so that he can maintain his bachelor status in zeal w.r.t finances will have the broader base…..
    Atleast for females even if we start our career at 22, the next phases gets tougher… long term assignments are night mares….


  14. I see few people who are still stincking rich who stays with the parents without getting married, absoulutely.. when we expereince more in IT, our salary increases & just think how will it be when you have the raise in salary & your expenses are almost NILL…..! Not even in my dreams.. (Joke!!)
    Money mindedness is altogether a different factor…!!!
    Mohan can actually have a different section in Bellur’s blog & can continuously speak about finance as he is a domain specialist. We need not wait for such post ON & OFF🙂

  15. M O H A N Says:

    Veena,
    Pyramid is just a concept of layering your investment. When i start charging my clients as investment advisor here is what i woudl lay down
    a) Have 6 months worth of liquid case in savings account preferabaly those linked type of things provided by CITI bank
    b) Have a TERM insurance of 10 times your annual pay in case you are the lone bread winner
    c) Take medical insurance of atleast 1 lakh for entire family even if your company provides the same.

    Next do your risk appetiate and goals. In other words these translate to if i lost all the money can i still continue living and i need atleast 12 lacs for my daughters marrige 6 years down the line.

    So such goals are first factored into your planning. This includes your age in terms of how much risk you can take.

    Next based on mutual discussion invest certaion portion of what you can save every month in Diversified Mutual funds, Debt bonds, Tax saving instruments.

    What more is pending can be deployed into equities of large caps.

    More diversification can be done using Gold MF’s ( some are yet to reach indian markets)

    So this % of allocation in pyarmid is directly dependent on your risk ( age in other words crudely)

    Cheers
    mohan!


  16. enri idu.. ee list nodidre hridaya hodidu koLLutte, iro baro duddella illa kottu namma mane ration elli tarodu ?

    shiva shiva..

  17. M O H A N Says:

    Entire list enu shopping beda re… nimma kiyali agidashtu ashte


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