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LOW INTEREST RATES – THE WAY FOWARD

For 31st October 2003 World Thrift DayBy Ravi Abeysuriya, CFA

It is time that savers in Sri Lanka realize the difference between saving and investing. The primary goal of saving is to postpone spending by setting aside some funds for emergencies and keeping them safe. This is

why savings are generally placed in fixed interest bearing bank deposits that are considered safe. They can

 be easily converted into cash on short notice with no loss of the principal. However, savings provide low

fixed returns.

Over-dependence on bank deposits is a contributory factor for the loss of welfare to savers in Sri Lanka.

With the reduction of bank deposit interest rates, you need to be cautious in investing in high interest bearing

fixed deposits of risky finance companies (if rated, some may have a credit rating of sl BB or sl B) and

mushrooming unregulated financial institutions. Savers should not forget the fundamental principle that

high interest means higher risk. Such institutions offer high interest rates for their borrowings simply

FACT SHEET FOR INVESTING

Learn to live within your means

Use credit cards, but pay your full balance on the

due date

Know your receipts and spending and have a

spending budget

Learn as much as possible about investments

Establish investment goals

Pay yourself first by regularly allocating a portionof your earnings for investing

Remember it is small amounts invested regularly

that become large amounts over time

Compound interest is your greatest friend

Know the rule of 72 - Divide 72 by the interest rate and the

result is the number of years it will take to double your investment. If you earn 6% interest on your money, it will take 12 years (72/6) for your original investment to double in value

But it is how much real returns (interest rate less

inflation rate) that you could get that matter 

Invest till you retire but reduce risk of your portfolioas you get nearer to retirement

All investments carry risk RULE: the higher the

risk, the higher the potential reward

Know your risk tolerance: the amount of 

 psychological pain you’re willing to suffer for your 

investments

Monitor your investments regularly

Seek Professional investment advice

Do not put all your eggs in one basket

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rates and to generate economic growth and employment. The risk reward anomaly where default risk free,

government securities were paying higher interest rates than risky bank deposits has been eliminated. A 20

year benchmark yield curve has been created to price long term corporate debt. The Government is

committed to developing an exchange traded corporate bond market and strengthening the institutional

investor base, all of which will lead to a more efficient financial market in Sri Lanka with wider choice of 

investment alternatives. If you the savers are to benefit from the financial sector reforms you need to accept

change, alter your attitude towards investments. Those who take time to learn about investing are the ones

who will most likely succeed. Take your choice: you can either change your long term prosperity by

 prudently investing for a secure financial future or you can continue getting what you've gotten up to this

 point by resisting change. You need not go very far, ask any pensioner their plight today; you will hear a sad

story. Of course, if you are already a pensioner the only remedy for your predicament is to hope that the

government increases your pension and banks would be considerate enough to pay higher interest on bank 

deposits for over 60’s, if they could afford it.