COMMON MAN'S INVESTMENT OPTIONS
SHAMSUL GHANI (firstname.lastname@example.org)
Aug 11 - 17, 2008
The fall of national savings rate from 17.8 per cent in FY07 to 13.9 per cent in FY08 indicates that a major portion of disposable income was sucked in by the inflation-induced high consumption, leaving little room for savings. The reduced profit rates on national savings schemes and historically low returns on bank deposits prompted people to commit their savings to speculative investments namely stock exchange, property etc. Traditionally, the investment options available to the people having excessive disposable income are:
Investment in Property
Investment in shares
Investment in gold
Investment in life insurance
Investment in Bank deposit schemes
Investment in national savings schemes
Investment in Mutual Funds
Investment in COIs
Investment in property and high-risk shares are the options available only to the high profile investors having large sums of money at their disposal. The common man with tiny amounts of saving in his hands can only look to the banks, and if he is a bit informed and educated, to the various national savings schemes for the placement of his money with an expectation of some sort of regular income in addition to the safety. If he understands the mechanism of stock market and is a bit prudent at the same time, he may opt for investment in mutual funds.
The general guiding principle for a low profile investor is, "better sleep well rather than eat well." High return investments are essentially high risk investments. The common man's objectives should be the safety of his money and a reasonable return to make for the diminishing purchasing power of his money, as far as possible. He has to strike a balance by checking on three basic parameters - safety, liquidity and yield. - in accordance with his own circumstances. Investment in property may turn out to be a high yield venture, but it may require an outlay beyond the means of the prospective investor. Again, he may be trapped in a slumping real estate market which situation may put a big question mark on the liquidity of his investment. The chances of a fraudulent sale of a disputed property may endanger the safety of his money. Investment in high profile stocks promises a high yield but the probability of burning one's fingers is too high. A small investor is well advised to drop this option outright. Investment in gold has been the centuries-old practice popular with the common man, particularly the women folk whose undying love for gold provides them a chance to eat the cake and have it too! Not only their urge to show off is satisfied, but the rupee value of the held jewelry also keeps appreciating with the passage of time. Isn't investment in gold a good option?
State Bank's weak policy measures during the last five years have given the banks a reason to fleece their depositors who have been persistently short changed. The recent directive to allow at least five percent return on saving accounts has brought back some sanity to the rate of return regime. The common investor with safety and liquidity high on his agenda may choose from the wide product range being offered by the banks. The Shariah aspect is being duly taken care of by various Islamic banks now operating in Pakistan. The Riba free Certificate of Islamic Investment being offered by Meezan Bank carries option to draw profit on monthly or quarterly basis. Investment in life insurance has always been a doubtful starter in Pakistan, probably owing to some religious misgivings. The Takaful companies are now offering Shariah compliant insurance products. Islamic insurance investment is yet another option for the common man with extra disposable income.
HOW TO KEEP THE PURCHASING POWER OF YOUR MONEY INTACT?
The highly unfavorable profit rate structure being offered by the market to the common investor and the galloping inflation make it impossible for the masses to maintain the purchasing power of their saved money. With the inflation rate assuming a double digit proportion, the real profit rate on savings is - has been and is going to remain for a longer period of time - negative. The enhanced rates on national savings schemes too fall short of offsetting the inflation factor. Moreover, the profit rate structure has never been updated in line with the rise of SBP policy rate. The table to follow highlights the anomaly in case of a 10-year investment in Defence Savings Certificates. In 1999, when the SBP rate was 13 per cent, DSCs carried a rate of 15.97 per cent. Now in 2008, when the SBP rate has regained the 13 per cent level, the rate offered for the same investment is 13.56 per cent, the astronomic rise of the inflation level notwithstanding. The rates offered by NSS are always the highest in a given market. This disparity becomes more pronounced when seen in the light of banks' profit rates structure.
SBP RATE OF DISCOUNT
DSC PROFIT RATE
When checked on the parameters of safety, liquidity and yield, investment in NSS is by far the best option. The Shariah compliance factor is a hurdle that CDNS has taken to surmount through launching of Shariah compliant products.
MUTUAL FUNDS MARKET IS ANOTHER OPTION FOR THE COMMON INVESTORS
A number of close-end and open-end mutual funds offer a reasonable return, in some cases even more than those offered by national savings schemes. When checked on the conventional parameters, it will be observed that normally the close-end mutual funds give a reasonable yield in addition to being liquid in the normal market. But the two benefits tend to neutralize when the market is in the grip of bears, putting a question mark on the safety factor. The fall in fund prices, however, appears less pronounced when compared to the fall in banks share prices, as evident from the tabulated figures.
MARKET CAPITALIZATION (RS IN MILLION)
KSE 100 INDEX
CLOSE-END MUTUAL FUNDS
April 15, 2008
August 04, 2008
If managed by really independent managers, mutual funds can become the most reliable, attractive and stable market for the common investors. The tendency to uphold group business considerations - the natural outcome of the cartelisation of the financial sector -has put a question mark on the efficiency of mutual funds market.
Leasing and Modaraba Companies, ever existing in a state of liquidity crunch, often borrow from individuals and companies by issuing their Certificates of Investments, COIs at attractive rates of profit. This opens yet another avenue for the common man to invest his savings. Orix Leasing, one of the leading leasing companies in Pakistan, offers following products in the shape of COIs:
1. Monthly Profit Plan; gross expected rate of return up to 11.25 per cent per annum, with different maturities up to five years; minimum investment amount Rs.500,000/-
2. Periodic Profit Plan; expected rate of return up to 11.50 per cent per annum, with different maturities up to five years; minimum investment amount Rs.500,000/-
3. Money Builder; gross expected rate pf return up to 14.51 per cent per annum, with different maturities up to six years; minimum investment amount Rs.1,000,000/-
4. Quick Gain; expected rate of return 8.50 per cent per annum (payable at maturity) with different maturities up to six months; minimum investment amount Rs.100,000/-.
This represents a brief round-up of investment opportunities available to a common man. It is presumed that each individual will choose an investment mode according to his own prudence and the specific ground realities he is living with. He will also do well to study in detail the conditions attached to a particular investment product.