Are clients saving less for their milestones?
Indians have generally been very good savers. However, in a recent RBI bulletin. I came across two observations which are worrisome for all of us.
According to the report:
1. 1. In 2008-09, the Household Savings Rate was 11.8% of GDP. This rate has seen a decline over the last 5 years. The latest Household Savings Rate was 7.7% of GDP.
2. 2. Since 2008-09, the Consumer Price Index has averaged 9.3% CAGR.
If we evaluate the above statistics further, we observe the following;
a. The LIFESTYLE COST across whole of India has gone up by 56% (approx) in absolute terms in last 5 years.
b. The Household Savings Rate has gone down by 34.74% in absolute terms in last 5 years.
According to the above observations, household investors are not keeping pace with inflation and also not saving enough as per their earlier potential.
Net financial savings include cash investments, deposits with banks and non-bank companies, investments in stocks, mutual funds, debentures, small savings, life insurance, provident and pension funds.
There could be several reasons for decline in savings rate like: Increased savings in Gold, Increased Savings in Real Estate, Low Income Growth / Job Creation in urban areas, and Higher Consumption per household on account of higher CPI.
There can be one more big reason for saving less:-
“It seems that some investors are disheartened and demotivated to invest in Financial Assets due to lower returns from Stock Markets, Mutual Funds, Post Office, Insurance Policies, Bank Deposits, etc. “
While all the reasons can be true for falling savings rate, the latter could also be a major reason. At the same time, it’s a clear recipe for trouble ahead if not rectified now.
Fall in Savings Rate may or may not have much effect on the overall economy, but for sure, it will have very high impact on accomplishment of milestones by every household. Every family plans and invest for:
(i) Higher Education for children,
(ii) Marriage of children,
(iii) Retirement of Bread winner, and
(iv) Medical Emergencies before and after Retirement.
All the above costs have risen over last 5 years at a rate which is more than CPI. On the other hand, investors are saving at a lesser pace. This shall surely hamper the “Magic of Compounding Effect”. With every year passing by, the milestones are coming nearer. The investments, being cyclical, will also eventually deliver desirable returns sooner or later. But, since, investors may not have participated in investments as per the original plan, theywill fall short in attaining long term financial goals.
Our advice to our client should be:
a. A. Investors should save higher every year in a disciplined way to match the inflationary effect on future expenses.
b. B. Investors would do well if they are not driven by flavors of the season kind of investments. This leads to over exposure to a particular asset class and creates illiquid assets.
c. C. Every asset class in the world is cyclical in nature. There is no asset class that will earn profits or losses forever. Its true for Stocks, Mutual Funds, Gold as well as Real Estate. Outside India, even interest rates fluctuate highly. Investors should maintain a healthy basket of inversely correlated asset classes in the portfolio. This reduces the overall volatility of your portfolio.
d. D. Maintain healthy liquidity of the portfolio at all points in time.
e. E. TAX paid on future investment income is highly avoidable. You should plan extensively with asset classes that are tax efficient.
f. F. Avoid the asset classes that are highly leveraged. We should learn from Sub- Prime Crisis of 2008. The most over-leveraged asset class in India is Real Estate.
g. G. Beating inflation should be the first objective of every investment. You should plan your investment accordingly.