KARACHI, Aug 24: Where should the professionals, retired persons and middle income households invest their savings in the face of declining interest rates on government securities and bank deposits?

These investors generally tend to be risk-averse and their options are narrowing down in the movement from a regulated economy towards a free market. These investors are not aware of the intricacies of the market and are often deterred by the volatility that tends to benefit the speculator.

Strangely enough, when the investors relied on experts to handle their investments, the results turned out to be no better, if not worse. Historically, for example, the returns on the mutual funds have been very low, in many cases negative. The growth of the industry has thus been adversely affected.

Whereas, the size of the mutual fund industry prior to recession and corporate fiasco in the US was 120 per cent of the banking deposits and 12 per cent in India, it was under three per cent in Pakistan. In India, four persons out of 100 invest in mutual funds, the ratio is four out of 14,000 for Pakistan.

The stock markets lack depth. Only shares of two companies and ten TFCs were floated in the year ending June 2001. Good scrips are closely held by the management and financial institutions with very little left for the minority shareholder. Very few shares are actively traded and the number of core-income stocks leave much to be desired. The outcome is that less than one per cent of the population is stated to be interested in shares and stocks.

Of course, there are some flotations that generate the interest like the offer of NBP shares to the small shareholders.

With the stock market not fully reformed that could offer attractive returns, the official anxiety to integrate the financial market is seen as premature.

The government recently reduced return on National Saving Schemes (NSS) by up to 2.5 per cent. In January 2001, the NSS returns were linked to yields on government bonds, to be determined on a six monthly basis.

The nominal weighted average yield on NSS was 15.8 per cent during 1995-2000, but dropped to 11.5 per cent in 2001-02. On the basis of the official rate of inflation, the government says real rate has improved from 7.9 per cent to 8.9 per cent.

Brokerage houses, however, say that “there is higher yield alternative for investors” in TFCs. The yield is better than NSS as TFCs “carry varying degree of default risks,” says a financial analyst. And the market response is determined by the performance of the corporates floating the TFCs.

However, analysts at IAMC say that the entry of large corporates and commercial banks into the TFC market and their reluctance to dispose of these high yield securities, liquidity is limited. They recommend investment in pre-IPO issuance of corporate debt instruments to benefit from the yield due to per value purchase and price volatility in case investors want to exit the security in the secondary market.

With the inflation rate down, bank lending and deposit rates have dropped sharply over the past few years. In developed states, the interest rates are much lower and credit far more cheaper. In view of the global trends and absence of any large scale investment in the domestic market, the interest rates are likely to decline rather than pick up. Finance Minister Shaukat Aziz wants the banks to reduce the lending rate to a single digit. It is likely to impact on deposit rates as well.

The short-term dips and rallies in interest rates notwithstanding, in the long-term, the cost of funds would tend to decline in the face of growing role of human skills that would propel businesses in an uncertain and complex economic environment. “Ideas are capital and the rest is money,” says a German bank.

In case of major banks like NBP, HBL, ABL and MCB, the yield on PLS accounts ranges from 3.50 per cent to 4.10 per cent. And the return on one year deposit ranges 7-8 per cent. The yield goes up 11.50-12 per cent in case of smaller banks with 2-3 branches. The major banks with a large network of branches do not accept deposits of more than one year. Leasing companies and investment banks also offer certificates of investment (COI) or monthly income schemes or capital growth certificates whose return are somewhat higher considering the risks. Some small banks and major DFIs have been liquidated and weaker ones are being merged into stronger ones. The declining interest rates would also impact on the new products of major banks.

Yet another option with the average investor was the US dollar. In the face of depreciating rupee, dollar accounts served not only as a store of value but also yielded attractive returns ranging 15-18 per cent in addition to tax exemption. With the rupee stable and the US economy likely to hit double dip recession by the end of the year, the greenback has lost much of its lustre and is likely to weaken further. Investments in local currency offer better returns than dollar holdings and foreign exchange deposits have plummeted.

This leaves gold and property for the investors. Apart from investment in jewellery, gold is just seen a speculative investment for short-term in political crises with abnormal volatility in the market. Only genuine buyers of property are in the market and investors are on the sideline.

An IAMC survey conducted in June 2001 indicates that investment is moving towards safe heavens in response to rising economic uncertainties. From 48 per cent, investment in fixed income securities, without any risks, rose to 53 per cent. The share of saving and fixed deposit rose from 37 to 40 per cent. Investment in National and Defence Saving Certificates was up from 11 to 13 per cent. Simultaneously, high risk investments dropped from 25 to 14 per cent. The investment in shares and mutual funds dropped by three per cent to eight per cent and in dollar accounts by one percentage point from 12 to 11 per cent. However, investments in prize bond soared from eight to 12 per cent.

The emerging market that the IMF and the government is trying to foster has not fired the imagination of the investors from the middle income group. Or in an era of change, conventional wisdom does not work.