Improving returns from savings
 

by Elmo Leonard

The rate of inflation from February 1, 2006 to January 31, 2007 was 20.2 percent. The point-to-point inflation rate covering January 1 2006 to December 31, 2006 was 19.5 percent. It is now apparent that inflation is very high and possibly on the rise, while the war-situation prevails in our country.

In such a scenario, depositors, or, people who could yet, save a little money, are puzzled over what they could do with the little money they save.

A marine engineer who worked abroad and has surplus money said that he was going to "consume the money." What he meant was, that we should buy today, for tomorrow, more money will be needed to buy the same goods which we could purchase today.

Another engineer, also in his early 60s said that he will buy land in a rural setting and wait for it go up in price. This person does not want to reside on his land. That could be very risky, and if he has to seek litigation to recover his land, the cost will be very high, including man hours and energy.

The third person who did not wish to be named, is a human resources manager. He has no money to invest and thought the question does not involve him. When he retires in two years, he will decide what to do with the provident fund he receives.

Dr. Anton Fernando, a professional, said that it is very difficult to save any money with rising inflation. What is earned, goes into fighting the cost-of-living.

Dr Fernando had found that some people who could save a little money, had invested it in local tourism as international tourism has waned. He thinks that when the war is over, the international tourist could be persuaded to use the infrastructure built for local tourism. Or such hotel rooms or restaurants, would not need large sums of money to upgrade.

Dr. Fernando also found more Sri Lankans eating at food chains such as McDonalds, Kentucky and Pizza Hut. Such people also invest in consumer durables from upmarket Odel, for instance.

Here, again, we have stumbled upon people who want to invest in goods, rather than save, because the money they save, loses value.

Savings accounts are not usually advertised, in such a scenario, the mean rate of interest varies from 6 to 8 percent, and cannot buffet rising inflation. A banker compared the rising inflation rate to gangerine setting in some part of the body of an otherwise healthy human; inflation is contrary to the growth and well-being of an economy, he said.

Thus, the investor should diversify from traditional savings account, to higher risk accounts.

There are many advertisements today, offering around 18 percent interest for long term fixed deposits. What the advertisements do not tell the potential investor is that long term interest rates are on the rise.

These ads attempt to attract investors to put in their money for 48 to 60 months. When investors point out such things to finance companies, attempting to lure investors, the answer is usually, "OK, you put in your money for six months, and when interest rates climb higher, you can put it in for a longer term."

It will be a wise move to invest money in fixed deposits, on a long term, if there are signs that interest rates will come down and the rupee will stabilise.

Chief executive officer of NAMAL S Jeyavarman said that people should now be more aggressive in investment, rather than commit their savings in traditional savings methods. Fixed deposits in banks, pay 10 to 12 percent, but savings give 6 to 8 percent per annum.

National Asset Management Ltd (NAMAL) has four unit trusts.

People should put part of their money in shares. Those who cannot handle shares should invest in equity funds so they can expect a better return.

Jayavarman points out that the Namal Growth Fund grew by 31 percent in 2006. This fund has also recorded substantial growth during the past five years. People can make use of such a fund to improve the returns from their savings, he said.

A common sight at corporate AGMs are retired people who have brought shares, but do not know to handle them. If the company does not pay a dividend or a dividend that is less that what could be got from a savings account, they are at a loss.

An investment advisor from USA, told such potential investors in Colombo, that his name was not seen in cricket, because he neither knew the rules or the techniques of the game. Therefore, he advised those who did not have a knowledge of the working of the stock market, not to purchase without sound advice.

Another way to beat inflation is let your foreign exchange grow in Resident Foreign Currency (RFC) and Non RFC funds, because these accounts in dollars and pounds sterling appreciate against the rupee. Even if you travel abroad, when you come back, and have the required amount, you can open a NRFC account.

The Bank of Ceylon allows NRFC holders to take loans, with the foreign money as collateral. The BoC interest rate is 10 percent, for such loans, on the diminishing capital. There are also other benefits from holding such accounts.

At a time like this, you must make use of the financial institutions, including the banks, to earn more money. Do not be afraid to ask your local banker for advice.

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