Pakistan has been plagued with inflation for a long time, which creates pressure to meet day-to-day household expenses in limited income. It is extremely important that an additional source of income is available, which cushions monthly expenses. Investment management has long been carried out for additional income, however, in an inflationary environment where cost of living is increasing year-on-year, having and executing a plan for investments of residual funds available on hand or savings is gaining strategic importance. Since inflation is on a decline, it is expected that interest rates in Pakistan will decrease. This decrease will help increase credit off-take to individuals and consumers whereas returns offered by banks will also reduce. A Pakistani consumer is a net spender and has no orientation to save since monthly household expenditures erode entire earnings. Those who choose to keep their savings in current account without even considering any Islamic mode of investments have a high opportunity cost for earning, which is forgone. A layman saver would not know any other invest avenue apart from keeping funds in banks. The financial services industry does not invest in marketing of investment and saving plans with the exception handful banks.
State Bank of Pakistan (SBP) has maintained the discount rate to 10 percent and may call for another reduction of 50 bps in the next Monetary Policy decision as most expect at the back of inflation. Though this is a positive sign, bank returns no longer become attractive avenues. As and when SBP announces discount rate, profit rate offered by banks have declined. Long term deposits with banks ranging from 1 year to 3 years range between 7.5 to 8.5 percent. Corporate clients with volume deposits can expect a rate between 9 to 9.75 percent. The returns on NSS are averaging between 10 to 12.5 percent, however, considered a more popular option among the masses. Bahbood Saving Certificates and Pensioners Saving Certificates are averaging between 12 to 14 percent.
The above mentioned investment options are such where there is a penalty of early withdrawal of principal, which would reduce the net return by 100bps to 200bps. Mutual fund investment in Fixed Income would yield stable return, however, the front end load and management fees would reduce the net return. Returns on mutual funds are either based on stock markets or average returns on fixed income or combination of both. If an individual wants to invest in a money market fund, the returns would be at par with the average returns on T-Bill’s and TFC’s and range between 9.8 to 9.9 percent.
Placement of funds for short term in Investment Portfolio Securities (IPS) is also gaining popularity primarily through word of mouth. No bank has openly advertised such mode of investment where Treasury Bills for a tenor from 3 months, 6 months and 1 year can be purchased at a discount. The advantage of IPS is that returns are at par with short term NSS or Money Market Mutual Funds, which are guaranteed over a short tenor since its government backed. Another investment option that could be explored for diversification is investment in REITS with returns tagged through rental income of the property under REITS. Various Insurances companies also offer investment plans based on bonus schemes based on annuity payments with a lump sum return after the end of the tenor. Trading in gold, silver and crude oil as mode of diversification form conventional stocks is also gaining popularity. Commodity trading is the riskiest of the options since market movement are unknown. It takes a specialized team to ensure investor’s interest is safeguarded. With high inflation in the economy, it becomes pivotal that investments are done to hedge against rising prices for a stable income with an aim the annual returns should not be negative. Various investment options would depend on risk and return profile, age, education, experience, savings and retirement goals. Though options are various including stock investments, it is important that individuals could explore other avenues for placement of funds to ensure stability in income.
Investment avenues for those who have high liquidity are an investment in Real Estate with returns averaging 8 to 12 percent on purchase and sale. People from Pakistan have also invested in property in Middle East and Western markets for rental income. Particularly talking about USA, there are people from Pakistan who have invested in low cost housing scheme with a value less than US$100,000 each which can be rented between US$800 to US$1,000 a month. In doing so, returns not only become at par with returns in Pakistan, they are also US denominated which given the investor an advantage to earn further through devaluation. Many housing schemes have sprung up in Pakistan where people have invested. Bahria is the front runner with developments in major metropolitan cities. Another strategy to invest is the property market in USA is to give a down payment of 20 percent and buy as many low housing properties. The returns from rental are used for payment of mortgage. Till the life of the loan, an earning stream is developed and property is owned. In Pakistan, people are more oriented towards investment in purchase and sale of land at a profit.
There are many investment opportunities in the market, provided an investment plan is made with targets based on current and expected lifestyle. Savings plan has to be made first before an investment plan could be considered. If a person finds himself in an environment where savings are had to make, other avenues should be explored either through switch of job at a higher compensation or working two jobs. Once a plan is made to save certain percentage of income each month, the same should be invested for returns. Additionally, certain percentage of returns could also be reinvested for additional earning. For those who are literate with knowledge of finance, weighted average should be calculated for all investments with returns and reinvestments updated timely. Financial software’s to plan for investments or savings are readily available online, whereas, same can be drafted on Microsoft Excel. It is never too late to start investing and managing funds, only challenge is to decide, when to start.