In India, interest rates are going down from past few years. This falling interest rates have crippled the financial planning of some people, mostly who are investing mostly in debt instruments. It’s also affecting the retirees as major part of  their retirement corpus gets invested in such options. 

Let’s understand the situation of earlier times than today. Financial planning was completely different 15-20 years ago. In the past, there were fewer and traditional investment options like FD, RD, Post Office MIP etc. which were more popular and common than equity or stock market. Also, people knew that investing is a long-term concept, which means they need to keep money in these options for a long period of time in order to earn interest. That’s why they used to invest for the long term. Further, at the time of retirement, for employees, Defined Benefit Plans such as pensions, were the main source of income. The situation has now changed drastically due to the steady decline in interest rates. The government, too, has now started shifting from “Defined Benefit Plan’ (like Pension) to “Defined Contribution Plan” (like NPS).

So far, many changes have taken place in our lives, in the surrounding conditions, in the world of investment, in the economy. Such as lifestyle changes, advanced medicines and medical treatment, the impact of inflation, rising cost of living, increase in life span, employment, the impact of the IT sector and new gadgets etc.  All of these changes forces you to seriously think and plan for your future, but people still expects to get the high returns with safety from FD or bank deposits. Previously, people were investing in these options believing in the tag line ‘FD or interest rate instruments are the safest’. But as now time has change, the ever-declining interest rate and the impact of the tax on (earned) interest income, leaves investor’s pockets literally empty. 

Other side to the coin  –

Today,  investors have so many investments options  from FD to stocks, real estate to gold, future and options, Bitcoin to other digital currencies. With so many options, investors are seems to be losing their patience too.

Further, due to change in lifestyle, use of new gadgets; millennials/young generation are spending more and saving less. Easy availability of loans from many different providers and easy use of credit card i.e. ‘plastic’ money, making spending decisions easy. Today’s comfort is a priority over future comfort and hence there is no control over spending. 

Funny thing is- people are paying high interest rates for using other’s  money (loan and credit card companies) and they are not getting any interest on their own money, which is saved in the bank.

Although the new generation is more accustomed to this expense, people in the older generation traditional FD / RD zone still believe in saving more. It is unfortunate that the some people from millennials/new generation have not learned from older generation about savings, disciplined investment and exercise restraint in investing. Otherwise, in this new age of investment, options like stocks, mutual funds offer high returns and helps to accumulate wealth over long term. We all need to move on to these new investment options but with old investment principles like more savings, long term investing and patience.

Ultimately, financial planning is about securing you and your loved ones financially. Any change in the economy, in the rate of return, economic conditions or change in the source of income, can also change the financial plan. Therefore, it is better to review your financial plan due to any of such changes and invest in different asset classes like real estate, mutual funds, stocks, gold etc. This is called asset allocation & diversification. It has a major advantage – where your loss in an investment is offset by the profits of other investment classes. For example: – When the stock market is down, the price of gold rises and when the price of gold goes down, the stock market goes up.

It’s better to diversify and do right asset allocation in your investments depending on your age, life stage and other financial requirements. Even a person approaching retirement or a retired person can diversify their investment into mix of debt and equity for getting regular income and to earn some returns which can beat inflation.

Invest in investment options like equity, mutual funds, but with old investing rules is more beneficial than relying only on interest instruments.