How to Save and Invest in the Present Economy

Sri Lanka has been experiencing an unprecedented crisis, as a result of both internal and external factors. This has resulted in a highly inflationary environment. But now the situation is changing and higher rates mean better returns for savers. In fact, with the right investments, it’s even possible to make a lot of money during times like this. In this article, we’ll look at some of the best and most accessible ways you can protect the value of your money.

Understand the Real Interest Rate

Subtracting the rate of inflation from the nominal interest rate will give you the real interest rate, i.e., the real rate of return you are getting on your investments. You can derive the real interest like this:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

Sometimes, this real interest rate can be negative. For example, if you’re getting 15% on a fixed deposit, and inflation is at 17%, then you’re actually getting a real rate of -2%. Thus, you should always try to look for ways to generate returns at least in line with inflation, in order to maintain the purchasing power of your money.

Play a Good Defence

In this environment, your primary goal should be to ‘protect the purchasing power’ (real value) of your capital (savings). Once you have achieved that, then you can consider growing your wealth in real terms.?

This also means putting your money into safe places. While most investment opportunities available to the public from licensed banks and finance companies are secure, there are some risks involved with higher yields from places such as finance companies, and even some banks on some types of investment products. So, make sure not to put “all your eggs in one basket”. Sometimes, you may also have to settle for a slightly negative or zero real interest rate, just for the benefit of generally preserving the purchasing power of your money intact.?

Easily Available Methods and Tools

There are many easily available tools and methods for people to choose from, when looking to save and invest their money today.

Short Term Investments?

For terms of less than one year, your options will include instruments such as Treasury Bills, Fixed Deposits, Unit Trusts and Savings Accounts.?

Fixed Deposits – These are offered by banks and finance companies. While bank FDs are almost risk-free, FDs from finance companies can come with significantly higher risk and also significantly higher rates as a result.??

However, Fixed Deposits from a trusted and reputed bank, such as Seylan Bank, are probably your best bet for both short term and long-term investments. And with rates at decent levels, you can hope to enjoy good returns on your investment.?

Fixed deposits can be opened for varying tenures (durations), often anywhere from 1 month to 5 years or more. Plus, you can choose to receive your interest payments monthly, or at maturity, with the best overall rates being available for at-maturity interest payments. The minimum amount required for a Fixed Deposit is also very low, at just LKR 25,000 depending on the total time period of the fixed deposit you are opting for. You can also open your fixed deposits online, if you already have online and or mobile banking enabled.?

Overall, Fixed Deposits are probably the most accessible and convenient way to protect your savings from inflation, while also potentially generating real returns over the long term.?

Normal Savings Account – Your average savings account is good for holding money for the very short term to meet expenses, while earning some interest. However, there are also special savings accounts such as Seylan Accelerate, which is an all-round banking proposition with special benefits for savers.

With Seylan Accelerate you can enjoy not only interest on your savings but also other benefits, such as a preapproved credit card, to affordably enjoy yourself and achieve your aspirations, while saving with various special offers, discounts and privileges year-round, with ATM transaction fees waived off. Accountholders enjoy Seylan Mega Rewards, which are cash grants you can unlock when you reach important milestones in life, like your wedding, childbirth, retirement, 21st birthday, professional exams and more. Plus, you’ll also enjoy easy access to personal loans, leases, housing loans and educational loans, so you can grow your skills and your net-worth, while saving.?

Treasury Bills – These are government debt securities and are the safest and most risk-free investments. Plus, they currently yield much higher and better rates than fixed deposits, and the barrier to entry is low. Even in the current circumstances, as these are denominated in LKR, there is almost zero risk involved. You can invest in T-Bills through any bank or institution that is a primary dealer, and investing is open to anyone over the age of 18 years.?

There are many benefits to investing in T-Bills, including guaranteed interest and maturity proceeds by the Government of Sri Lanka. For Rupee denominated T-Bills there is zero risk of a default, so it is probably the most secure investment you can make. Plus, unlike fixed deposits, you can trade T-Bills, which means you can liquidate at any time and take your returns up to that point. As the market for treasuries is the most liquid financial market in Sri Lanka, you can be very flexible and liquidate quickly and easily.?

T-Bills are also transferrable so you can always transfer ownership to someone else, whether it is a loved one or another 3rd party. You can also invest jointly in these instruments, which make them an excellent way to share wealth with those you love. As the whole market for treasuries in Sri Lanka is electronic and fully-automated by the Central Depository System (CDS), you never have to worry about security or loss of assets.?

Unit Trusts – These are funds that will pool the money they collect from investors to invest in various securities and share profits with investors. Returns from these funds can be variable, but usually provide attractive rates, often higher than market.??

Thus, amongst the short-term options, treasury bills are presently the most attractive, and with rates as high as 24% recently, these can provide a genuine way to protect your purchasing power and keep up with inflation. Plus, as the market for government securities is highly liquid, you can always liquidate your position on short notice.

Longer Term Investments

If you have extra cash or are building an investment portfolio, then there are more options available to you. Unfortunately, Sri Lanka’s financial markets are not sophisticated, so your choices are limited, but there is still plenty of opportunity.?

Equity – If you do your research and buy into value, you are likely to gain handsome, outsized returns over the next few years, as Sri Lanka’s economy recovers and the market begins to price in inflation and other factors.?

Investing in shares requires some basic knowledge, and for you to decide on your approach; will you be trading or making long-term investments. For trading, price is crucial, while for investing, it is the fundamentals behind the company that are all-important. You will need to do your own research in this to find the approach that suits you best.?

Alternately, there are various unit-trusts and wealth funds that will manage your money in the equity market for you, and for a fee. For those who do not have the time, or are unwilling to learn about the complexities of a stock market, relying on professionals who can deliver consistent returns may be the best option.?

Gold – While gold is a good investment, given that Sri Lanka’s gold prices are above world averages, holding huge amounts of gold as an inflation hedge is not the best strategy. Still, from a Sri Lankan perspective, gold has continued to outperform.

Real Estate – If you do your research, there are plenty of amazing opportunities in real estate as well. Particularly right now, as some properties may be going at a discount.?

Other Opportunities – There are also other investment opportunities that you can use to protect your capital, such as cryptocurrencies, and private investments in businesses, commodities and other assets. However, they are beyond the scope of this article and we are unable to recommend them due their unregulated nature. Plus, they require significant knowledge to profit off of and come with significant risks attached too.

Bottom Line

The bottom line is that, in the times we live, you need to take control of your financial future. A large part of this is protecting the purchasing power of your money. This means either investing in interest bearing investments, where the real rate of return is at least in line with inflation, or by acquiring assets that rise in price during an inflationary environment. If you have trouble deciding or want more advice, simply reach out to us and we’ll be happy to help you.