With the continued global economic decline that has been further accelerated by the COVID19 crisis, economies everywhere are faced with a loss in the value of their money supplies. Importantly the disruptions have impacted the savings practice too which is the most common banking and financial activity for people around the world. Sri Lanka is no exception. According to the Central Bank, the Household Saving Rate (HHSR) of Sri Lankans decreased to 18.90% in 2020 from 21.30% in 2019.
It is not just that the HHSR is on a declining trend, even the Lankan savers who reaped benefits through their savings accounts are now ‘struggling.’ The private sector has been hit by the COVID crisis and to revive it a low interest rate strategy was nationally adopted. While this spurs the struggling private enterprises and helps them, the market interest rates falling to single-digit level as a result has impacted the Sri Lankan saver who is used to ‘gainful returns’ from them. As the traditional ‘savings route’ is not bringing gainful returns similar to previous levels, it is time for savers to explore instruments of investing their funds in formal investment avenues that generates higher return on investment.
To highlight the importance of adopting an investment mindset and enhance the value of Sri Lankans’ disposable income, the Lions Club of Colombo Host 306A 1 has recently conducted The Money Matters 1.3 – Savings & Investments: Two Sides Of a Coin Or An Illusion?, the 4th episode of its Financial Inclusion and literacy series attended by Sri Lanka’s top investment and financial experts. The session focused on the allure of various investment avenues and their attractiveness for traditional savers who now seek higher ROI for their funds.
Investment Expert Ravi Abeysuriya stressed that in Sri Lanka Fixed Deposits and Savings accounts are used on the belief that they are safe and reliable. This outlook is further reinforced by the existence of Deposit Insurance Scheme which insures savers of savings accounts up-to Rs 600,000.00. Savings accounts are seen as an easy way to preserve funds and their value. Fear of losing their capital in investments pushes people to take this easy ‘savings’ way. However, due to their low ROI, they are unable to preserve the value of funds against raging inflation and declining interest rates. “Investing” is a current commitment of money for longer periods to generate future returns that will reward the investor more than through usual savings. The three factors of investment -time period, expected rate of return and level of risk – are to be analyzed for best returns across tangible or intangible asset classes. Savers are also advised to seek a professional’s advice when they switch to investments. The investment advisor should take the investor’s personal interest to heart rather than be incentivized by commission rates that they could earn. The advisor needs to create an investment strategy for the investor using an Investment Policy Statement which formulates a portfolio that would best serve the investor. All investments should not be in one channel in an “all eggs in one basket” nature but be diversified based on the Investment Policy Statement, thus reducing the overall risk. The overall returns should be commensurate with the risk. The investor should not go into investments that they do not understand but are advised to make ‘caution’ their best ally when investing. The portfolio should be regularly reviewed. Investors are not advised to go into unregulated schemes such as purchasing overseas stocks and shares where the downside risk could be huge. Answering a question on the prevalent ‘Pump and Dump’ practice in the Sri Lankan stock market, Expert Abeysuriya said that it is not advisable to invest in any stock merely based on its price increase but investing should be based on its fundamentals on which the investor has to do their own research. ‘Pump and Dump’ practices are dangerous especially for a small market like Sri Lanka. If investors are not focused on speculating alone, then a good strategy ‘that cannot go wrong’ and could be considered is investing in “high dividend yield stocks” that, despite their market price, would still serve good dividends.
Unit Trusts (UT) industry expert Ruwan Perera said that UTs are an investment avenue that has been gaining increased attention. Though UTs commenced way back in 2010 they did not become popular due to the perception and fear that they are linked to the share market –which is not so. Funds collected from the investors are invested in various financial assets such as shares, treasury bills, treasury bonds, debentures and other securities. The income earned from these investments and the capital appreciation is shared back to the unit holders in proportion to the number of units owned by them. Since they are managed by professional Fund Managers investors are not burdened with investment research. Based on the risk appetite of the investor, they can choose to use a Money Market Fund, Indexed Fund, Share Market Fund or a Balanced Fund etc. There have been no defaults in this sector since it is regulated. Investors can win in this sector if they consider in addition to ROI, a few other factors: the Trust Fund’s previous track record, branding, sectoral specialization, liquidity, risk level, investment time-line, taxation on returns, and round the clock availability of the investment manager.
Real Estate Investment Expert Nayana Mawilmada said that Real Estates (RE) are an attractive hedge against inflation with ‘extremely robust returns’. In the last 10 years, the inflation averaged at 2% while returns from the All Share Price Index was at 3.4%. As for RE, the compounded growth rate in the value of lands in Colombo is a strong 6.5%. However, RE is not as liquid as many other investments and therefore RE investors should be able to hold their investments over the long term. Responding to a question that if there is an oversupply of apartments in Colombo presently, UT Expert Mawilmada said that there is no such outlook apparent in the medium term. As more people move closer to cities, demand for city housing is on the rise. Only 10% of the housing in greater Colombo are multi-family houses. This is the reason that more apartments are being sold. The problem in this sector however is the non-availability of apartment units at the correct price point.
Insurance Expert Ifthikar Ahmed said that insurance is a risk management tool with a penetration of 15% in Sri Lanka. An insurance contract transfers risk from one party to another party by absorbing the risk and protecting the other party. Its three categories -Life, Health and Investment- have picked up sudden interest with the COVID19 crisis. Answering a question as to how to identify the most suitable insurance product for an investor, Insurance Expert Ahmed said it depends on the investor’s life stage, their net-worth as well as the availability of any inheritance. Apart from Investment Insurance products, Health Insurance is also important as the available free healthcare services in the country is not consistent and not fast enough in comparison to private healthcare.
The Money Matters 1.3 – Savings & Investments: Two Sides Of A Coin Or An Illusion? Was moderated by Asitha Pinnaduwa, the President of the Lions Club of Colombo (Host) 306A1 2021-22 and Certified Expert in Financial Inclusion Policy. This session was enabled with a sign language interpreter to make the session more inclusive for people with hearing disabilities, and Ms. Tharaka Gabriel, a qualified sign language interpreter facilitated the event.
PHOTO CAPTION :
(FROM LEFT)
Mr. Ravi Abeysuriya, Director/CEO of Candor Equities and an Independent Non-Executive Director of Seylan Bank PLC, HNB Assurance PLC, & Bio Foods (Pvt) Ltd, Mr. Asitha Pinnaduwa, Certified Expert in Financial Inclusion Policy, President Lions Club of Colombo (Host) 306A1 2021-22, Mr. Nayana Mawilmada, Sector Head, John Keells Properties, Mr. Ruwan Perera, Chief Operating Officer, NDB Wealth Management Ltd. President, The Unit Trust Association of Sri Lanka, Mr. Iftikar Ahamed, Managing Director, Softlogic Life Insurance PLC, President – Insurance Association of Sri Lanka