Imagine year 2019. You have retired, and you have received Rs. 120 lakhs as your provident fund accumulation. The bank is willing to pay you 2% interest on savings accounts and 4% p.a. interest of fixed deposits. The government has scrapped nsc, and kvp. Post office pays about 0.25% more interest but the have a cap of Rs. 500,000. PPF account has a new rule – people above the age of 55 years cannot invest and accumulation above Rs. 25L will carry interest of 2% p.a.

What will you do as a Retired Investor?

Well it was worse for the US Citizen who retired in 2009…yes savers have been hit very badly, and all of us must thank Raghuram Rajan for holding the interest rates high. Indians must thank the govt. for nsc, ppf, kvp – the US has nothing like that.

Now for the younger people…or jokers like me who believe that debt NEED NOT PLAY an important part of one’s portfolio EXCEPT to the extent of meeting 5 years or 10 years household expenses.

First of all rejoice. A low interest rate forces you to look for other more sensible assets and forces you to look at words like asset allocation if you are a typical Indian investor who loves debt assets and more debt assets.

When the Fed recently announced that they were increasing the rates they charge banks to borrow, markets got jittery. Some investors got angry. News shouters and commentators were lamenting the situation that investors in developing countries were doomed.

Let’s say you have Rs. 10,000 saved up and you deposit it in the bank at 0.5%pa. After a year, you’ll earn Rs.50.

Now, let’s say the rates shot up to…4%! Now you invest your 10,000 and take home 400 after a year. Even if you could earn 7%, you only take home 700 for the year. That when inflation is hitting you at 12% p.a. Your eating out, travel, conveyance, medical bills, and children oriented expenses – education, hobbies, clothes, …are doing that. Of course you can be in denial by using Mental Arithmetic.

Rs. 700 is not bad of course, but it’s not going to change your life. But staying there and waiting for interest rates to go UP from here is the stupidest waiting game that you can play. The whole world believes that it is nice to borrow and spend – so there is a conspiracy to keep interest rates low and safe or high and risky. Two Indian corporates recently recently raised risky high priced debt. If you wait for interest rates to go up, you will remain there – right in the mud.

Short-term interest rates usually stay right around the inflation rate. 

Long term interest rate yields are very attractive ONLY if you are a passive investor willing to be happy with JUST the carry and not try to earn the capital gain / worry about mark to market losses. Not easy when you have a Portfolio Manager at home aka the Television.

Sadly, most people don’t know this – especially young people. According to surveys EVEN IN THE USA, a whopping 3/4th of Americans between the ages of 15 to 24 don’t know ANYTHING about investing. Almost 50% of them believe that putting money in a savings account is the  BEST WAY OF INVESTING.

But as I said again and again and re-repeating, cash is probably the worst long-term investment there is. Lets take the LONGER DATA FROM USA -shares  averaged 10.12% from 1926 to 2014. Bonds 5.67% over that period and cash (savings bank account) brought up the rear with 3.46%. OBVIOUSLY the numbers in India are much better favoring equity.

Worried About The Crash

Investors, especially young investors,

have been brought up on media warning them about ‘crash’ ‘how market cap of Rs. 100,000 crores was washed off in a day’ or some such shit. Living with parents working in banks, central government, or manufacturing companies has not helped much either. They need to come out of that, and fast. They are losing precious time.

But look at the facts, and the numbers which are screaming AT YOU. The investor who avoided “calamities” like World War II, break up of Russia, European depression, Japanese melt down may have kept their money in a money market fund in the USA. If so, they saw $10,000 climb to $13,472 more or less. This is what the average money market fund returned over that period for the American investor. However, over that same time, an index fund that mirrored the S&P 500 grew to more than $17,000 – despite those HARRROWING downturns. In other words, the S&P 500 index fund, PASSIVELY MANAGED, returned just about twice what the money market fund did during one of the worst 15-year periods ever.

Of course this is no guarantee of future results, but there is a logic for equity investing. For young people, these numbers point to a crucial point- think long-term.

So What You Should Do Now?

Don’t worry about low interest rates. See the UNIVERSAL MESSAGE that God wants us to see.  When you have LONG TERM money, do not copy your wealth DESTROYING parents. Sorry,  if I have hurt your sentiments. If you need your money in a couple years or less, stay with liquid funds or keep it in the bank and don’t worry about the interest rate. You will not EARN much but you’ll have safety and liquidity – EXACTLY what you need for short-term money.

Create your financial plan. Match your investing with your ultimate goals.

Stop trying to predict. It is difficult to predict, especially, if it is about the future.

Even if you use a dynamic approach to investing and think you are a calm investor, you’ll still have to deal with investment losses and disappointments. Your patience will be STRETCHED. You’ll have to deal with all that. If nothing else, the last 40 years taught me that. The time you lost in learning about equity CANNOT be made up, but hey, better late than never, right?

If you have a 3 year old, start a rising SIP, today. Yes maybe interest rates are in the basement. Maybe it will get lower. Nobody, repeat nobody knows how long they’ll stay low but it could be for a long time. When rates do climb, they probably won’t be much higher than inflation – if at all.

YOU and ME can do nothing to combat low rates now – and in the future – accept it sanguinely.