Bank deposits: Care as much about risk as you do about returns

The singularity of returns as an investment objective is the cause of most misery. Every investor knows it too well. But, everybody thinks it won’t happen to them. So, when my phone rang even during a vacation and the callers were family elders – dad's friends and my older clients who do their own thing – the singularity returned to touch my life too. The questions were on their fixed deposits in two private banks. They were worried as hell and wanted me to advise them if they should close those fixed deposits. The value of the deposits was very large. And, they all said they could not afford to lose the amount. "Why on earth did they not ask me when they deposited the money?" Some questions remained stuck in my mind voice. I could not even ask them.

The advice was simple. "Steer clear of trouble. Settle for less. Your job is not to save a bank from going under. That is the equity investor's job. And, if the equity investor fails to do her job, you get reduced to receiving just Rs 1 lakh, no matter how much money you deposited. The downside is as much yours. That would place you almost at par with the equity investor of a badly managed bank. Is that what you want to be? Would you buy the shares of that bank?"

Nothing is risk-free

They still wanted me to say that "All is well" and that things would settle. Truth be told, there was an outside chance of everything being well. But, after the IL&FS crisis, we are a very different country. And, I am not be willing to believe that what RBI did with GTB (Global Trust Bank) and Nedungadi Bank would be the default option. The law does not bestow absolute rights of protection on a depositor's money. It is limited to Rs 1 lakh. So, we simply can’t take the return of our capital for granted. There are definite attendant risks involved.
And, an investor in a bank deposit needs to rise above the singularity driven investment approach. One must think of return of capital as much as we think of return on capital. The primary investment driver must be risk and returns should be seen as a function of risk. The need for duality is urgent and wanting in our investment approach.

We must prioritise suitably. While this duality driven approach is far superior to a singularity driven one, investors collectively forget this as public memory fades quickly. Every crisis is seen in isolation, and lessons are rarely carried forward. It is important to note that the two HFCs (housing finance companies) that are presently troubled, raised money within an hour through their public debt issues just a few years ago. Singularity of returns was the clear driver.

Nobody even thought about the risks – the probability of losing capital and potential insolvency. It would not be out of place to say that most investors in those issues did not even know of the asset-liability mismatch rampant in the two companies. But the problems with the troubled banks are an entirely different story. Here, the problems have been more openly stated in the public domain for the past few years. Their stock prices were clearly ringing the warning bells like a Tsunami alert. But, depositors were clearly not bothering enough to follow these events.

The time has come for depositors to think beyond the singularity of returns. Lower returns are a better choice if they offer better certainty on return of capital. The extra one per cent is simply not worth being the primary investment driver. Choosing to earn less with better certainty and peace of mind are more holistic and sensible. I am reminded of the ad slogan for the fixed deposits of a now defunct south-based NBFC, "Life is too wonderful to be spent worrying". How I wish investors respect and value their peace of mind above their returns!

(The writer is co-founder iThought)