Investors may be divided broadly in two categories — the rich people and individuals/families of moderate means, including serving/retired employees, seeking investment outlets to supplement their incomes.

Obviously, locating investment outlets is not much of a problem for the first category of investors because they have means to earn from real estate, stocks and other businesses. They can even hire services of competent fund managers and use their influence for multiplying their wealth. However, it is the second category which faces problems in finding suitable outlets foe investments.

There was no problem for middle income group until 1999. Investors got reasonable return on the NSS instruments [14-16 per cent per annum. and banks also paid higher than inflation rates--10-14 per cent return on term deposits. Then came the reform in the financial sector. The salient features of these reforms were:: (a) reduction in the interest rates on the NSS instruments (b) reduction in interest rates on deposits, (c) reduction in interest rates on the government Treasury bills [T/bills]--at one point of time, the State Bank of Pakistan (SBP) brought down the T/bills rates as low as two per cent per .annum. (d) handing over of big commercial banks to foreigners—United Bank Ltd was sold to a Middle Eastern party in 2002 while the Habib Bank Ltd to Aga Khan in 2003, .

Options: Under the current scenario, small investors have the following options: (a) mutual funds, (b) stocks (b) NSS instruments and (d) accounts with banks. :

Mutual funds: Several “mutual funds” operate in the market. The earning base of these funds is trading in stocks and the dividends received by them on the portfolio they hold.

At present, earnings from the “units” of those mutual funds whose pay-out is in the form of “bonus units” are comparatively much higher. But is this phenomenon sustainable in the long run? The answer is not “positive” because the value of stocks held in the portfolio of a mutual fund can dwindle at any moment which may not only cause capital losses to investors but regular income at the periodical interval may also not be possible. Here one would recall the collapse of National Investment Unit (Trust ) portfolios in 1996/97 when the NIT was so starved of funds that it failed to redeem its units. The investment in mutual funds is also not risk-free for small investors.

Stocks: Investments in stocks in a highly volatile market- no more than a speculation `shop’- can never be a feasible option for small investors. In 2005/2006 stock exchange scams, many small investors ruined themselves.

If a small investor purchases shares with excellent pay-out record and keeps the same on long-term basis to benefit from dividends, it can be a viable option. But speculators in stocks have more than doubled the KSE- 100 index during the last 2 ½ years [from 6218.40 points at the close of the year 2004 to around 14000 points now]. If any stock is purchased at the current market price now, the yield to cost will be less than what is available on the NSS instruments.

NSS instruments: Investment in NSS instruments is the best option for small investors from the view point of yield and security of money. Investors who have crossed the age of 65 years can invest in Bahbood Savings Certificates/accounts where interest rate is 11.52 per cent per annum,. i.e. a sum of Rs960 is paid every month on the investment of Rs100,000.

While NSS instruments like special savings/defence savings certificates can be purchased from or encashed through commercial banks, the work relating to the Bahbood certificates has been centralised at the National Savings Centres. As the number of these centres is too small, the government should consider assigning this job to commercial banks for the convenience of the old-age citizens.

Bank accounts: As mentioned, depositors of banks are being badly exploited mostly by the private sector while their profits have soared over the last few years. A table containing the deposit rates and the banks’ overall profitability is appended.

Interest rates for savings bank accounts have been used as bulk of the deposits remain in the savings accounts.

The peculiar feature to be noted in the table is that interest rates started becoming negative with the sales of the United Bank Ltd and the Habib Bank Ltd. Similarly, banks’ profits started soaring since then. There has been over 112 times increase in the profits of the banks during the last half a decade.

The response of the State Bank is “ If the depositors are uneasy, they should shift their deposits elsewhere where they get better returns”.

Perhaps, the small depositors should pull out their money from banks and re-invest the same in NSS instruments like special savings/defence savings certificates. Senior citizens of the age of 65 years and above should now opt for Bahbood savings certificates/accounts.