Demonetization – An investor’s view point.

Greetings of the season. It is 10 days since the announcement of demonetization of Rs 500 and Rs 1000 notes was announced by our PM. Life has changed for all of us in the last 10 days and we get to see, read and hear so many information on the subject which are both for and against demonetization.
However, a major decision, like this would have been made after careful thought and at this stage, there is no looking back on this. We have been reading about the effect of this and who stands to gain or lose on this.
I am not going to broach on this aspect. However, I thought, what this decision, offers to us, as investors. I enclose with this a one pager, where I have tried to capture the effect of this into four buckets. Basically have done a SWOT analysis. Strength and weakness can be read as positives and negative effect of the decision. Please read this and do contact me for any clarification.
Most Important.  Don’t panic. Stay calm. Educate yourself and take an informed decision.
Now how you are likely to be affected as in investor.
a.  FD rates will come down. Some banks have already cut the fixed deposit rates. This is mainly due to the inflow of approximately 2 lac crores in the banking systems till yesterday. This reduces the income for people who are dependent are interest income.
These people can consider moving to debt funds, which can give around 2 to 3% more than the bank FD. These are not exposed to equity markets and are relatively safer.
b. You can see considerable drop in the post office savings rate, which is adjusted every quarter. You can see upto 0.5% drop in PPF, NSC, KVP rates. For investors, who park their funds, in PPF for future, can consider ELSS funds, which give the same tax benefit, higher returns and lower lock in.
For your information, in the last three decades, the FD rates on an average has been as follows.
1981 to 1990————- 10.5%
1991 to 2000—————11.525% ( Crisis in 1991, 1997,2000)
2001 to 2010 —————6.6% as the rates touched a low in 2004 to 2007
2011 till date —————7.26% and is likely to come down thanks to inflation and demonetization.
c.For investors, who are willing to take minimal risk, MIPs could offer a good entry point now and in the next few months, whereby, the market rise in the next two to three years could be rewarding.
Please note that the India Growth Story is intact but this is a correction.
d. For equity investors in both direct equity and mutual funds, this gives a great opportunity to invest
However before you choose your instrument for investments, please go through my mail on Investment ladder, ascertain your risk capacity and risk tolerance and invest accordingly.
As always, I am available to help you choose the investments. Do contact me.
VS Varadharajan

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