I know you must be thinking I’m crazy! How can savings be a bad thing? Do you even save, bro?
Of course, it’s not a bad thing. But what you do with those savings is what can make a significant difference to your life. If you have a sizeable savings account balance, you have done better than a vast majority of Pakistanis already. Saving money is important – but if you are not putting that money to action, you are missing out. Think about it this way – inflation rates in Pakistan have been hovering around the 10-15% mark since 2010 and have only recently gone down to around 5%. As long as your savings are not growing by at least as much, you are actually losing money!
The problem is most people who are able to save don’t necessarily know what to do next. Accumulating money in a savings account is great, but think about the opportunity cost of having that money sitting around generating minimal “interest” or “profit”. For the purpose of this article I will use these terms interchangeably since I understand many people might have a fundamental disagreement with the idea of interest. Personally, I am a pure capitalist and I believe that I should make the most of the system that has been in place for decades. Banks charge you “interest” when they lend you money, so why shouldn’t you do the same in return?
As a general rule, you should consider capping your personal savings at six to nine months’ worth of expenses. This can be your “emergency fund” to cover you against events like losing or quitting a job, an illness or other unexpectedly rocky financial times. Once your savings go beyond this figure, you start missing out on investment growth. Typical savings accounts in Pakistan offer around 3-5% annual interest. There are plenty of ways to achieve returns higher than this, especially in our growing economy.
If you are a risk-averse person, you should at least consider saving in the highest yielding savings account. MCB offers above average rates of 7% on some of its savings accounts. Term deposits (TDR) are also a safe means to invest and achieve steady growth. They generally provide similarly low interest rates which increase with the amount you invest and the duration of the tenure. Durations range from one month to five years for most banks. Profits are paid out monthly, quarterly or annually, depending on the product. One benefit of TDRs is for example, if you invest in a one month TDR, you can request the bank to “rollover” your profits and keep reinvesting. This means your TDR keeps renewing at an increasing price (principal + profit) every month, which allows you to benefit from compounding interest.
For the more adventurous savers and investors, equity markets in Pakistan provide an attractive option. Most people generally perceive “investing” to be simply in the stock market. To the common citizen, the stock market seems to be dangerous place. I would not be exaggerating if I said it is thought to be too volatile and risky an avenue to take your hard-earned cash to – a casino of sorts. This perception ultimately leads to a lot of people holding onto way more cash than they should in places which are not ideal. How many friends and family members do you know who still hold on to cash in their closets and bedrooms? Although, financial institutions and the SECP are taking great steps to increase awareness of financial products and financial literacy – for example the Jama Punji scheme (do visit www.jamapunji.pk to learn about how to save and invest in Pakistan).
Investing in equity does not necessarily mean you are directly investing in the stock market. Why not take advantage of the hundreds of mutual funds available in Pakistan, some of which have been consistently rated the best in the region over the past few years? Investing in the stock market independently does require some research and confidence, but there are professionals out there who do this for a living. Yes, you will have to pay them a fee, but chances are that your returns will be greater. There are funds catering to all kinds of risk appetites. If you are a risk taker and are looking for aggressive returns, consider funds such as the AKD Opportunity Fund, Al Falah GHP Stock Fund or the UBL Stock Advantage Fund that have consistently provided returns between 10-20% for the last few years. These funds primarily invest in stocks, something that you might not want to dive into on your own. Returns on stocks are achieved through two means: dividends and capital appreciation. If selecting stocks to invest in yourself, you should aim to have a balance of blue chip, dividend paying stocks (for starters, look at their dividend payout history) and those you perceive as “growth” stocks which are likely to increase in value over time. Similarly, it is critical to do your research before investing in funds and read previous reports which will tell you which securities they invest in, their objectives and the fund manager’s track record.
The key benefit of investing in funds is diversification. You may not have enough capital or know-how to invest in multiple products, but the funds do. Funds such as the UBL Growth and Income Fund have a more diversified portfolio of investments. They balance the high-risk stocks with low-risk instruments such as government bonds which provide a lower return but are considered safer. Such funds are catered to those with a lower risk appetite and are happy with a slightly lower return, which may still be higher than what a typical savings account would offer! There are literally hundreds of funds out there for all kinds of investors. You might want to visit http://www.mufap.com.pk to get a better idea of what is available.
When investing in the stock market directly or indirectly, you should never be in it to make a quick buck. You should always be investing for the long-term – two to three years at the very least. Stocks and funds are liquid investments which you can buy and sell as you please but you will be charged a fee on every transaction. Your goal should be wealth accumulation which would benefit you and your family in the long run. Short of the lottery, there are really no shortcuts in life. If you want to really improve you and your family’s quality of life, you must balance being proactive and responsible with your savings.