Category: Personal Finance

Liquidity Risk

Fixed Deposits may be withdrawn at any point of time, and though you may not get the pledged interest, as a result, they are called liquid assets since they may be liquidated at any moment. Bank FDs are simple to liquidate, meaning that you can break your FD before it matures. Unfortunately, a penalty may be imposed, and the amount of the penalty differs from one bank to the next. In the instance of tax-saving FDs, you can withdraw before the 5-year term expires. If we take liquidity risk as an example, customers need to pay a penalty of 0.50 per cent across all maturities for premature withdrawals from SBI FDs up to Rs 5 lakh. The bank has set the penalty for premature withdrawals from SBI fixed deposits of more than Rs 5 lakh but less than Rs 1 crore at 1% for all tenure. On deposits that are kept for less than 7 days, no interest will be provided.

Bank default risk

In case of a bank default, an investor is solely insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Savings accounts, fixed deposits (FD), current accounts, recurring deposits (RD), and other deposits are covered by DICGC’s insurance. Each depositor at a bank is covered up to a total of Rs 5 lakh for both principal and interest amounts, according to DICGC norms. If you have a fixed deposit in the same bank as a joint holder with your spouse, brother, or children, or if you open an FD as a guardian of a minor, and so on, all of these FDs will be regarded as maintained in a different capacity and right, and each account will be insured up to Rs 5 lakh individually. The DICGC insures all commercial banks in India, including foreign banks, local area banks, and regional rural banks and cooperative banks. The DICGC, on the other hand, does not cover deposits in primary cooperative societies. Furthermore, deposits in any NBFC, HFC, or corporate entity are not covered by DICGC. However, one should keep in mind that if you have deposited Rs 5 lakhs in a fixed deposit, you will only be paid for the principal amount, not the interest earned on the deposits if your bank collapses and if the total amount of the principal and accumulated interest is less than Rs 5 lakh, you would be paid the whole amount.

Inflation Risk

FD returns can often be on par with or even less than inflation, resulting in wealth destruction for the holder. Fixed deposit investors must pay extra attention to their asset allocation under the context of rising inflation and dropping interest rates, especially for those in the highest tax bracket. Even though many people consider volatility to be a concern while investing in mutual funds, inflation must be considered a significant risk when investing in fixed-income securities like fixed deposits. When evaluating returns on your deposit, it’s crucial to keep inflation in mind and understand the distinction between estimated returns and real returns. When it comes to fixed deposits, banks’ interest rates rarely surpass inflation. Furthermore, when interest income is taxed, fixed deposit returns especially in long-term deposits may go down below the inflation rate. To stay ahead of the interest rate advantage, it is preferable to invest in a short-term fixed deposit. Short-term depositors in lower tax brackets may be unaffected by inflation.

Interest Rate Risk

Bank FDs have the potential of locking you in for a lengthy period of time at a poor rate of return. For a long time, most banks have been reducing their FD rates. If you’re a fixed-income investor who relies on interest rate return, you’ll have to face hardship if you invested in a 5-year lock-in period. By considering interest rate risk, you will not gain if interest rates rise in the economy since you are locked into the FD at the present rate which is not a good sign for any investor. But if you have a 5% FD and market rates drop by 1%, you will effectively gain since you will be generating more than the market. To mitigate the interest rate risk of a fixed deposit, split your investments into different amounts and invest them for different periods of time. Splitting your deposit will protect you from interest rate swings while also providing you with greater returns.

Gold investors have gained pretty decent returns in the last 10-years in India. A mix of a rally in international prices and a falling rupee have propelled prices, resulting in pretty decent annualized returns to investors. Let’s take a look at the historical prices of gold in the last 10-years. In fact, gold has grown almost 10 times in the last 20-years.

Let’s take a look at the historical price movement of gold in India in the last 10-years. This is for 24 karats and reflects 10 grams. Prices are indicative and cannot be accurate.

The big post covid jump in gold prices

For almost 6-years between 2011 and 2017, gold prices barely moved in India. Thereafter, there was some marginal traction, but the real gains were notched in 2020 and 2021, following the discovery of Covid-19 infections. Gold being a safe haven asset, investors took shelter in gold and international prices rallied. In India, gold for 24 karats hit a peak near the Rs 54,000 levels, after which there has been some dip.

The sharp run-up in the last two years has prompted lesser investment physically in the precious metal. In fact, demand for gold in countries like India has reduced considerably. Physical demand over the last 1-year has also been jolted by covid-19 cases. Investors across the globe continue to look to invest in gold ETFs, where there maybe reasonable demand going ahead.

What lies ahead for gold prices?

With the rally of the last 2-years, it’s unlikely that we will see any solid movement in the precious metal. In fact, our own belief is that there maybe a long period of stability in the precious metal. Gold requires a trigger like a geo-political tension or a covid to spark a rally. Interestingly, the global economy is gathering steam, which is good news for equities and not so for gold. At the moment, in the short to medium term, there are no triggers to spark a big rally in the precious metal.

In India, the rupee movement against the dollar plays a big role in the movement of gold. If the rupee depreciates against the dollar, it leads to gold prices going higher and vice versa.

The government of India in the Union Budget proposals this year announced a cut in import duty of gold. The government announced cut in customs duty on gold and silver to 7.5% from 12.5%. India imports bulk of its gold requirements and hence the cut in the duty, did make gold prices cheaper.

Gold price movement in 2021, 22 karats at the local jeweller

As can be seen in the table above, the sharp fall in gold prices in the month of Feb and March was largely to do with the reduction in import duties of gold. Since then, gold in the international market has moved higher, which has pushed domestic markets higher. It’s likely that gold would hover in that range of Rs 45,000 to Rs 50,000.

Much would depend on gold prices in the global markets, where movement of inflation in the US and rising bond yields pose a major risk to gold prices. All in all, if you are looking to buy gold, you may do so only on declines, as there maybe a little more downside left. If you are looking at consumption related buying, then there is no choice, but to go ahead and buy.

Check gold rates in all major cities in India