FDs: Safety. Liquidity. Returns. Risk.

20 FEBRUARY 2020

When friends ask me which bank I have placed an FD with, I tell them: "I have no FDs in any bank. I keep some money in a savings account with the banks, some in Quantum Liquid Fund and most of my "safer" money in Quantum Multi Asset Fund. Knowing that I have kept my safer "money-in-the-bank" portion of my savings in this mix of products allows me to sleep well every night!"

Given the way FD rates have declined over the years, the risks that exist in the banking sector and the availability of new solutions which balance my need for Safety Liquidity Return Risk, I have little money in banks. I only use the banks for money to pay the bills for running the house. Not as a place to "invest" my money. Like many, I bank with the banks but - unlike many - I don't bank on the banks to give me what I need in terms of safety, liquidity and returns.

Let me explain why.

Any investment you make has to be ranked based on these four basic criteria:

  1. Safety: How safe is the investment that we make? If we invest Rs. 10 lakh in a bank deposits, property, gold, share or a mutual fund - or place it under our mattress, how safe is it? Will the Rs. 10 lakh still be there when we want our money back? Safety is the guarantee of our original investment amount being returned to us.
  2. Liquidity: Okay, the Rs. 10 lakh is still there and it is safe - but can we get our money back immediately? Or do we have to wait to get it? During the demonetisation exercise, we had to wait in a line to get money that was with us and not in a usable form and change it into new notes that we could use. And there were limits on how much we could withdraw: the Rs. 500 note that we had in our pockets or which we had in our account was safe, but it was not liquid. There was friction that interrupted the smooth flow of our money - the time it took to get the old Rs. 500 note changed into a new Rs. 500 note. Similarly, a property that was purchased could also be worth more than the Rs. 10 lakh that was paid giving us a profit in addition to the safety - but property investments are not liquid: there is a time factor and a transaction cost of stamp duties and registration fees to sell a property to get our initial capital back, even though it is safe. Liquidity, then, is the ability to get our original investment amount as quickly as possible with the least transaction cost, the least friction.
  3. Returns and Risks are two-sides of the investment coin: if I want a higher return, I need to take more risks. If I wish to take lower risk, I need to be happy with a lower return. This is why your investment advisors will always tell you to have a range of investments from: (i) the highest risk asset class of small and midcap stocks (or mutual funds which invest in small and midcap stocks), (ii) the still risky but lower risk "blue chip" or large company stocks (or mutual funds), (iii) the lower risk and lower return Fixed Deposit with banks. This diverse range of risk-return options also comes with a range of safety and liquidity.

This is the traditional Product Safety Liquidity Returns Risk matrix that everyone has followed.

And because it was followed blindly for years, people ignored the hidden terms and conditions. Over time, the nuances of market behavior and regulatory shifts made the asset classes, which neatly fell into the matrix in Table 1, behave differently.

Table 1: Traditional Investment Characteristics of the 5 main asset classes

FD with Bank Very High Penalty, early withdrawal Low Very Low
Property High Low due to time and transaction costs High Low
Gold High Medium Low Low
Large cap stocks High High Moderate Moderate
Small Midcap stocks Low Low High High

Changing times require new solutions.

Take the example of real estate. It is now proven to be less safe, even less liquid and has generated low returns with the highest risks compared to other asset classes. The flood of easy money and the explosion of new product launch and new construction in "Tier 2 and 3" towns since 2005 dramatically added to the riskiness of residential real estate as an asset class for investing your savings. Not only was property being built in far flung areas beyond the reach of urban transportation systems, but many new residential developments were being priced for a buyer who had never lived so far away from a city centre before. Over a decade after the Lehman bankruptcy, hundreds of thousands of investors across the country are still suffering from their investment in residential real estate. Projects remain incomplete or, if completed, the townships that were supposed to come around the property don't have the infrastructure and feel of the facilities in larger city-centre areas.

Or take the example of gold. It used to be that you could only own gold in physical form. In the form of a coin, a gold chain, a gold bangle, or a gold bar. There was the risk of losing the gold - either from carelessness or from theft. And to sell the gold you had to find a jewelry shop that would buy it. The shops could charge a high commission because the gold you owned was made into a product (a chain, a bangle) and the labour cost of producing that chain which you wore was useless to the buyer who may wish to melt it into a coin or a bar. So gold was a safe (though you could get robbed), not-so-liquid, and low return asset class from an investment perspective - with a relatively high transaction cost. Gold mutual funds and Gold ETFs have increased the safety and the liquidity of owning small or large amounts of gold. Over the last decade, the excessive and excited printing of money notes by many central banks in the world have, arguably, changed the return and risk equation of owning gold in your favour.

The staid and reliable bank deposit, a preferred asset class for many, is also undergoing a re-evaluation. The higher ratio of bad loans amongst many banks due to poor lending decisions (many linked to financing real estate developments) or plain siphoning off of depositors money by the "promoters" of banks has resulted in the RBI closing down many banks. This has led to a fear amongst depositors on the safety and liquidity of their money with banks.

Table 2: Banks put under moratorium by the RBI

S.No. Name of Bank Year when deposits/withdrawals were “frozen”
1 Sri Gururaghavendra Cooperative Bank 2020
2 PMC Bank 2019
3 Shivajirao Bhosale Cooperative Bank 2019
4 Kapol Cooperative Bank 2017
5 Rupee Cooperative Bank 2013
6 Centurion Bank of Punjab 2008
7 Sangli Bank 2007
8 Global Trust Bank 2004

Bank deposits secured up to Rs. 5 lakh.

In the recent budget, the Finance Minister announced that the government would increase the guarantee of our deposits with an insured bank (Commercial and Co-operative Banks) from Rs. 1 lakh to Rs. 5 lakh. This is, indeed, a big increase of 400% and it is wonderful that the Modi government has taken this bold step. The reality is that the Rs. 1 lakh guarantee was initiated in the year 1993. Over the past 27 years the Consumer Price Inflation index has moved from 100 to 588. This means that goods and services that you could purchase for Rs. 1 lakh in 1993 would cost you Rs. 5.8 lakh today. Hence, the Rs. 5 lakh guarantee - while a commendable move by the FM who has done what none of the five previous FMs bothered to do - is not that big a jump when you consider that the annual expenses of most households have risen by 488% between 1993 and 2020.

Using this CPI index as a proxy for household expenditure, for a typical household with a bank balance of Rs. 1 lakh in 1993, and assuming that this household spent Rs. 10,000 per month in 1993, then the guarantee from the government of Rs. 1 lakh would take care of 10 months of expenditure. Today, that same household may have made investments that allowed it to match the rising cost of living and may have a bank balance of Rs. 5.8 lakh - but their monthly expenditure would now be Rs. 58,000 per month so this bank balance would also take care of 10 months expenditure. But the guarantee amount of Rs. 5 lakh (though boldly moved up from Rs. 1 lakh) would take care of 9 months of expenditure of that household.

Table 3: The FM makes a bold move, outshining 5 previous Finance Ministers!

Year, Bank guarantee Bank Balance of household Monthly expenditure of household Guarantee will pay for how many months of expenditure?
1993, Rs. 1 lakh Rs. 1.0 lakh Rs. 10,000 10 months
2020, Rs. 5 lakh Rs. 5.8 lakh Rs. 58,000 9 months

Neither the Finance Minister nor the RBI have said anything about whether money lying in a troubled bank account will be frozen in future or will be available for withdrawal if a bank was to be shut down by the RBI. In rare instances of 8 banks since 2004, your bank deposits and FDs were not all safe and nor were they liquid.

Banking on the banks.

Every financial advisor will tell you that you must keep some money in the bank. You need that money for daily expenses and for emergency use: it has to be there when you need it. And when you ask for the money back, it should be the amount that you saw in your last statement - or as close to that as possible. In some instances you will need to break that Fixed Deposit to get the money back. So you may lose 2% or 3% when you break the FD - basically some of the higher interest you were to earn for locking into a FD will be denied to you. That is fair.

Everyone builds their own "asset allocation" model and spreads their investments between FDs, real estate, gold, and equity shares or equity mutual funds. There is no universal answer applicable to everyone - different situations require different allocations. This is why it is important to have a good financial advisor - or learn the basics to guide one's self!

My personal preferred allocation which I have had in place since the past 2 years or so is to aim to have the equivalent of nearly 36 months of what I need for my monthly expenditure in "bank deposits, FD's and highly liquid investments".

The rest of the money I split between equity and gold generally in an 80/20 ratio. Of course, changes in prices of assets move those allocation "targets" around a fair bit. When this 80/20 ratio changes we need to understand why the allocation has changed and then "re-balance" to bring the allocation to the various asset classes back within a range. For now, my allocation to equity is lower because I am concerned at the pace with which stock market indices in India (and all over the world) have been setting new peaks. Gold has moved up in price over the past one year but I plan to let the gold exposure drift higher since I am concerned about the health of the Indian economy and the possibility of the Indian Rupee weakening. Gold is priced off a global US Dollar price so it acts as a natural hedge to any likely weakness in the Indian Rupee.

Table 4: I don't keep money in bank FDs

Allocation, as of Jan 31, 2020 % allocation My target
Bank deposits (not in FDs) 2% 2%
Quantum Liquid Fund 25% 5%
Quantum Multi Asset Fund 5% 10%
Total, Safer and Liquid 32% 17%
Quantum Equity Funds, various 47% 62%
Quantum Gold Fund / ETF 21% 21%
Total 100% 100%

Overall, I have been a little "defensive" in my asset allocation and have a lower exposure than I should have in the various Quantum equity mutual funds. For now about 15% of what I should have in other Quantum mutual funds is parked safely in Quantum Liquid Fund. As can be seen from my "target" I plan to switch about 15% of my investments from Quantum Liquid Fund to the Quantum Multi Asset Fund and the various Quantum equity funds - when I feel more comfortable with stock market valuations.

As stated earlier: Given the way FD rates have declined over the years, the risks that exist in the banking sector and the availability of new solutions which balance my need for Safety Liquidity Return Risk, I have little money in banks. I only use the banks for money to pay the bills for running the house. Not as a place to "invest" my money. Like many I bank with the banks but - unlike many - I don't bank on the banks to give me what I need in terms of safety and liquidity.

Companies have already moved money away from banks.

The Quantum Liquid Fund and the Quantum Multi Asset Fund have replaced my need for safety and liquidity that bank deposits gave me in the past. The failure of banks and the troubles they continue to be in should put to rest the "100% safe" connotation that a bank deposit gives the uninformed investor.

The proposal to raise the ceiling of a government guaranty on bank deposit to Rs. 5 lakh is a very well-meaning effort, but it does not remove the image of depositors agitating outside banks that have been shuttered - banks that denied the depositors the access to their savings deposited with these banks.

Large companies have moved away from banks as their first port of call for safety and liquidity more than 20 years ago! They don't keep all their "safe" money in banks - they use liquid funds. Quantum has designed its liquid fund to invest only in government-owned entities and in government bonds. So there is no exposure to the private companies. Lower risk, gives lower returns: the Quantum Liquid Fund has given me lower returns than what I would earn from a 1-year FD locked up with State Bank of India. But I don't invest in the Quantum Liquid Fund for returns (I invest in the various Quantum equity funds for returns!) - I want to sleep well and not have a lock-up of my money and am willing to surrender some returns for this facility.

Graph 1: Quantum Liquid Fund earns less than the SBI 1 year FD rate: the price of daily liquidity

Khichdi or Biryani?

The Quantum Multi Asset Fund is a unique solution to a problem faced by many who have money locked up for 3 years or more in a Fixed Deposit and they wish to know whether they can invest in something else which gives some element of safety, liquidity, and return - without undue risk over that 3 year time horizon?

The solution to this conundrum was achieved by the launch of the Quantum Multi Asset Fund which invests in a combination of other Quantum products: the liquid fund, the equity funds, and the gold fund.

It's not a khichdi. It's a well thought out investment approach across the different asset classes. The Quantum Multi Asset Fund has been in existence for over 8 years now.

For a person with a more than 3 year investment horizon, an investment in Quantum Multi Asset Fund has given better returns than a Fixed Deposit (all returns are before taxes) for 1,444 days out of the 1,634 days that the Fund was in existence to tabulate a 3-year rolling investment record. This means that 88.4% of the time an investor with a 3-year investment time horizon had a better rate of return in Quantum Multi Asset Fund rather than in a bank Fixed Deposit. Additionally, the investor could have withdrawn their money at any time - without paying any penalty.

For 190 out of the 1,634 days (11.6% of the periods invested), the investor would have been better off being in the Fixed Deposit for a 3-year investment horizon. But, as the graph indicates, even when the returns from being invested in the Quantum Multi Asset Fund were lower than the return from an FD, it was not dramatically lower. On the other hand, the returns on the 88.4% of the days when the returns were better, they were much better.

Graph 2 and 3: Quantum Multi Asset v/s 1 year and 3 year Fixed Deposits - rolling returns

The Quantum Multi Asset Fund is not a solution for everyone. Far from it. It inherently does have more risk because it has equity and gold as some of the underlying asset classes in which it invests - both these asset classes can lose significant value on any given day. Hence, there is a need to have a 3-year or longer time horizon.

Individuals keep their "safe" money in their wallet, their cupboards, savings accounts in their banks, and in FDs for 3 months, 6 months, 1 year, 3 years and 5 years. The Quantum Multi Asset Fund is a possible solution for that longer time horizon of your "safer" money: the 3 year and above time periods.

Table 5: Quantum Multi Asset and FDs, comparison over different time periods; the longer your time horizon in a Bank FD, the more attractive the alternative of evaluating an investment in Quantum Multi Asset Fund

Time Horizon, days Quantum Multi Asset
did better, days
Fixed Deposit
did better, days
% of days when Quantum Multi Asset did better than FD
Daily; 2,760 days 1,850 910 67.03
3 month; 2,668 days 1,430 1,238 53.60
1 year; 2,395 days 1,300 1,095 54.28
3 year; 1,665 days 1,469 196 88.23
5 year; 934 days 890 44 95.29

There are clearly more moving parts of different asset classes and more inherent risk in the Quantum Multi Asset Fund than in a Fixed Deposit. And you should be rewarded for that higher risk - without ignoring the key elements of safety and liquidity which any investor in an FD must have.

Investing in the Quantum Multi Asset Fund is clearly not a One Glove Fits All Sizes solution: but it is something that you should investigate further and see whether some of your long lock-in FDs would be better invested in the Quantum Multi Asset Fund. And there is no freeze on withdrawals. It is your money and you can redeem it when you want at the prevailing Net Asset Value!

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Savings Fund Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF, 10% in Q ESG and 75% in QEFOF 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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4 Responses to "FDs: Safety. Liquidity. Returns. Risk."


Feb 25, 2020

Thanks for introducing another asset class for relatively safe returns.

Like (1)

Ramesh B

Feb 23, 2020

dear sir, kindly make multi asset fund , eqty oriented/hybrid fund to get max. benefit of the scheme.

Like (1)

Amrit Marathe

Feb 21, 2020

Dear Sir,

I see a divergence in the views expressed in this article and the views of
the Editors of various Equitymaster services, as well as the views of
Quantum Equity Fund Manager on equities.

This article puts a lot of emphasis of Quantum Multi Asset fund in contrast with
the earlier articles where the flagship fund, Quantum Long Term Value Equity
funds always got a thumbs up.

I do not know how QLTVEF lost out in the race.


Amrit Marathe

Like (1)


Feb 20, 2020

Hi,With the performance QLTEF is having for last 5 years, I would suggest QLTF to be compared with SBI FD. Then we may have paradigm shift that higher risk also necessarily may not generate higher returns...

Like (1)
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