If your biggest buyer buys 80% of your production, he can control price. Economics 101.

So Mr. P Chidambaram, the single biggest borrower wants to reduce borrowing costs. Nothing funny or odd about this, right? Well he borrows in many, many forms – and Indians (like many people around the world) LOVE ‘government guaranteed’ kinda words.

So Nsc, ppf, kvp, other postal schemes, and the greatest of them all commercial banks have tons of money coming in at 8% or 8.5% pa. Now if RBI reduced interest rates, more money will flow into government schemes. However there will be pressure on the govt to reduce interest rates on its schemes – which it will not do anyway! When the pressure becomes too much they do increase the interest rates a little bit, but that happens once in 5-6 years unlike a bond offering that adjusts to market every time there is an issue.

So what do you do if you are a saver? Life is difficult indeed. Your corpus has to be so big that interest rate drops or stagnation does not bother you. So if you need to live off your corpus you need to target a corpus size so big that a 3-4% yield is what you can live on. This is specially true if you are planning a 35+ year drawdown! Not easy at all.

Hence it is necessary to either have real estate in a nice location (making it attractive for a young educated couple to want to live there) so that you get a 7-8% growing rent. On the other hand you could have an excellent equity portfolio – where again you do not touch the PRINCIPAL till you reach 70 years of age. Assumptions like living age of 85 or thereabouts could also go haywire – and if that happens YOU again need a fall back. Hence a portfolio combination of rent, interest, and dividends is safer than a pure debt portfolio.

Remember the biggest borrower CAN control the interest rates – and this is criminally LOADED against the small saver. Sigh, alas. Of course there are some rotten companies accepting Fixed Deposits (there are people who love rated instruments, my views on ratings is – it is a joke)…for me these companies do not matter for MY MONEY. My debt is in PPF, bank FD, and SBI’s quoted debentures.

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  1. Dear Subra
    I started reading your blogs, just for the past few months. your views are little conservative and many of them are in line with Indian mentality, also very much needed for any Indian. However, here and there you are writing about to invest in equity which I’m not easy because, I should sit and read all news and hearing all rumors about the equity I hold which is little difficult because I’m not a person from/related to finance field. Finance planner or adviser’s fee to invest in equity is worth for a High Networth Individual and certainly not for a middle class man.

  2. Subrabhai, how did you buy the SBI quoted debentures? General q is how does one buy corporate debt because online brokerages like icici direct don’t seem to offer this?

  3. Dear Subra Sir,
    I am keen to understand why do you think NCD/fixed deposits of companies as bad thing. In fact, most of debt mutual funds invest in NCD of “rotten” companies to deliver higher returns. If you are against NCD because of risk involved then you must be against debt mutual fund for same reason (along with reason of high management cost 🙂 )
    You say that government manipulates interest rates and at same time, you say don’t invest in “rotten” private companies. In sum, you are saying don’t invest in debt.
    Also, you are assuming that equity is good because it has given returns of 15% in last decade. Well, now companies wont grow at 15% because demand from US and Europe is low.
    Also, everybody has to see what has happened in US. So much of quantitative easing and still stock market is not rising. Simply because, young people are not investing in equity. In fact a lot of demography is old and hence withdrawing money from equity market but nobody is putting money in equity market. Same scenario of stagnant equity market will happen in India after 30 years when majority of population will be 50 years old and withdrawing from equity market.

    I think this is the only time to lock in money in debt funds because RBI has held interest rates high whereas every central bank has kept it very low.
    Let me know if I have missed something obvious.

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