Unnerved by the steep rise in property values in Karachi, Abdul Razzak, 57, a middle cadre bank employee, desperate to own a flat before he retires, took out his retirement fund on June 7 and invested it in the capital market through a broker friend.
He was hoping to earn quickly over a year or two the amount needed to cover the shortfall in the prospective cost of a dream deal.
It was as if the market was waiting for him to enter before it crossed over the edge for a free fall. In the last one year, the capital market had lost over one trillion rupees in valuation as KSE index headed south. From 15000 in middle of last year, it has already travelled down to around 9000, an erosion of about 40 per cent. The sharp fall in stock prices has eroded valuations.
Today the man is in severe distress on the verge of losing his money. A resident of Parsi colony, an old locality in downtown Karachi, Razzak did not like to discuss factors responsible for his financial woes. “It was my mistake. I tried to play smart but there is no way to beat one’s fate”, commented devastated Razzak ending his conversation with Dawn over telephone.
Examples such as that of Razzak and his likes instil fear in the hearts of small savers. They become more inclined towards low risk and low return traditional options when it comes to investing hard earned savings.
There are no firm figures available on the total size of savers and investors. Less than two per cent of population or around two million people are in tax net. The last statistics available on the number of total bank account holders in the country is 2.6 million. An estimate, therefore, put total numbers of savers at around 8-10 million (five to six per cent of the population of 160 million).
Besides the capacity and the propensity to save is also low. Pakistan has one of the lowest saving rates in the world. Against high 25-35 per cent in Far East and China’s over 40 per cent, the average savings as percentage of the GDP is under 10 per cent in Pakistan.
Majority of middle class just save to buy consumer durables. Their long-term savings are meant for dowries and marriage ceremonies of their children and to buy a family house or a farm.
The absence of social security net induces them to keep a contingency fund that can come handy in case of emergencies. Often these are insignificantly small amounts hidden in some place in their houses.
Their interest and knowledge of options available for investment of savings in a gainful manner is, therefore, very limited.
It is also true that the run away inflation and pressures of changing lifestyles have greatly eroded the capacity of middle class to save. However, at least once in a life time, at retirement, the salaried people are confronted with the problem of surplus funds. They are called upon to choose from multiple investment options available in the market to park their emoluments.
There is a consensus amongst investment advisors that the middle class cannot afford to be too ambitious with their savings. To maximise returns they may experiment with ten per cent of their savings by placing it in investment tools with a promise of higher returns. The rest of the amount should be invested in secured options where there is no risk to the principal amount.
The recent two per cent increase in the government saving schemes (NSS) has made it an attractive avenue in the current scenario of low returns offered by banks on deposits. The new rate of return on defence saving certificates DSC has been increased from 10.15 to 12.15 per cent. On special saving certificate (SSC) the new rate offered is 11.25 per cent, on regular income certificates (RIC) the current rate is 11.52 per cent and on behbud saving certificates (BSC) it has been fixed at 13.56 per cent. The return on special saving account (SSA) has been revised from 9.25 to 11.25 and on saving account (SA) from 6.5 to 8.5 per cent.
The investment in gold has also proved to be beneficial for small investors but for security concerns only five to 10 per cent should be invested in the yellow metal.
The investment is real estate is an attractive option for long-term savers but does not typically suit retirees who seek to make some earning from their investment on a regular basis to supplement their pensions. Besides, the problems associated with controversial land titles and cumbersome legalities involved in transfer of land titles discourages hapless working individuals to opt for this option with huge promise.
The investment in capital market is advisable on a very limited scale and preferably through specialised institutions such as mutual funds, say a financial analyst.
Probably, the comfortable positioning of commercial banks has generally permitted them to ignore the investment requirements of middle class savers, though some banks have now started offering attractive returns on term deposits.
The discouragement of cartelisation streaks in the banking sector may gear them towards more competition and development of more products that better suit peculiar requirements of the middle class investors.