AS Pakistan’s economy continues to grow, many people find surplus funds at their disposal but there are not many areas of profitable yet risk-free modes of investment available to them.

Keeping money in bank accounts or parking it in the National Saving Schemes (NSS) is the safest way of investment but for some years banks have been offering a real negative rate of return on deposits i.e. lesser than the rate of inflation. For example, the average rate of return on one-year fixed deposit stood at 5.26 per cent at the end of the last fiscal year, when inflation that year was 7.9 per cent.

Investment in NSS has been a bit more profitable than the bank deposits but the real return on NSS too is barely a few percentage points above inflation on certificates of 10 years. For example, the return on 10-year Defence Saving Certificates (DSCs) stood at 9.46 per cent till the end of the last fiscal year slightly higher than the inflation for that year.

Investment in stocks and in the real estate yields far better returns than bank accounts and NSS. But both modes of investment are chiefly speculative and much less secured than bank accounts and NSS.

Bank deposit: Whereas bank accounts can be opened with Rs10,000 and minimum investment required in DSCs and special saving certificates (SSCs) is Rs500, one needs much more money to enter into the stock market or in the real estate.

At the end of June, total bank deposits stood above Rs2817 billion and the total number of bank accounts exceeded 26.3 million. Statistics compiled by the State Bank show that more than 47 per cent of the total deposits (Rs1332 billion) were in saving accounts on which the average return was only 1.67 per cent. Senior bankers often quote high concentration of bank deposits in saving accounts as a prime reason for very low average return on overall bank deposits. That is true. But what is equally true is that even the fixed term deposits have not been attracting a reasonable rate of return. See the table.

As the Table shows, the average return on fixed deposits of over one year to over five years ranged between 5.26-5.57 per cent.

Detailed analysis of deposit rates beyond June 2006 is not available but a nominal increase in the weighted average return on fresh deposits has been witnessed afterwards. The latest SBP data reveal that the average return on fresh deposits mobilised in January 2007 crawled up to 5.05 per cent from 4.72 per cent in June 2006.

The weighted average return on overall deposits of the banking system, however, stood at 3.72 per cent in January 2007 up marginally from 2.89 per cent in June 2006.

National Saving Scheme: Compared to very low profits on bank accounts, NSS’s offer better returns to investors.

The scheme covers five major saving instruments namely DSCs, , SSCs, regular income certificates (RICs), Bahbood (Welfare) Saving Certificates (BSCs) and Pensioner Benefit Accounts (PBAs). The last two have been tailor-made for the widows, senior citizens over 60 years of age and pensioners. The DSCs, BSCs and PBAs are of 10-year maturity whereas SSCs and RICs are three-year and five-year papers.

Till end-June 2006, the return on DSCs was 9.46 per cent whereas it was 11.04 per cent on BSCs and PBAs. And SSCs and RICs offered 8.74 and 8.88 per cent return respectively.

From July 2006, the government increased the rate of return to 10 per cent on DSCs and to 11.52 per cent on both BSCs and PBAs. The return on SSCs and RICs was increased to 9.34 per cent 9.24 per cent respectively.

These rates of return are applicable on full maturity and investors get lesser if they make premature withdrawals, yet the effective rates of return even on these withdrawals remain higher than the rates of return on fixed bank deposits.

For example, if one redeems DSCs on the completion of the fifth year, he gets eight per cent interest, which is far higher than the average return of 5.57 per cent on five-year fixed bank deposits. And in case of SSCs, profit is paid at the rate of nine per cent on the completion of the first six months out of the full maturity period of three years. This is almost double than the average return of 4.64 per cent on six-month fixed deposits.

Apart from higher returns, NSS are better than fixed bank deposits also because the minimum investment required is much lower than in fixed term deposits. Minimum investment for DSCs and SSCs, for example, is Rs500 only. Contrary to this, in most of the fixed deposits, people need to keep money in multiples of Rs10,000 or in multiples of Rs100,000.

Stock Market: Perhaps, the stock market offers a better alternative in terms of high dividends combined with appreciation in the stock value. But not everybody can make money out of stocks for the lack of the expertise needed for it. Those of the small and ordinary investors who dare invest into the stock market are benefited primarily with the dividends because the kind of speculative activities going on in the market makes it difficult for them to earn net price differentials in a given time. Long -term investors, however, not only earn dividends but also benefit from the appreciation in the stock value.

According to a study carried out by Jehangir Siddiqui, the estimated average annual return on stock investment stood at 11.14 per cent in the outgoing year. The researchers have arrived at this number by averaging out the dividends paid out by 60 leading companies in 14 listed sectors of the Karachi Stock Exchange.

The average dividend can differ with the change in the JS index but since the list of the 60 companies include every big market player there are least chances for a major change in it. Though the mutual fund industry is still in its infancy yet various mutual funds have also been offering better-than-banks returns to their investors over the years.

For those who cannot afford to invest directly in the stock market for the lack of expertise or time management, mutual funds are the best alternative but what irks most investors is that these funds often issue right or bonus shares instead of handing out cash dividends.

Real Estate: Investment opportunities abound in the real estate market but for wealthier people. Small investors stand no chance in this field as prices have skyrocketed in the past few years. Besides, most investment in the real estate is for speculative purposes thereby making this a doubly dangerous proposition for small investors. However, if the Real Estate Investment Trusts become a reality, small investors too, may be able to park their surplus funds in this area. Once established, these trusts would be working like mutual funds pooling the money of a number of investors for buying a piece of land and then distributing the profit proportionately as the market price of the land moves up.