Investing in India – Case for Bank Deposits

In the last article I discussed the returns offered by Indian Stock Markets from Jan 1991 to Mar 2007. In the article we saw that the “general wisdom” i.e. to buy and hold in the Indian stock markets would not have given any spectacular returns. A long term investor would have had better gains had he invested his money else where, real estate, gold or banks,

Before we proceed further lets quickly recap what we saw in the last article. For a long term investor, I would only look at the 10-year returns (as explained earlier 15-year returns do not provide a true picture as they are for 2006 & 2007, which has been a bull market). The 10-year period in question has witnessed severe bear market (Mid-2000 & to 1^st quarter 2003) and an equally impressive current bull market. To look at it another way BSE Sensex fell from 6000 points (in Feb 2000) to 2900 (in May 2003) only to rise to over 14000 (in Feb 2007).

So what have the average 10-year return been? Well, only a measly 6.66%. Risk, as measure by standard deviation, to attain those returns has been 5.54%. What this tells us is that 95% of the returns were between -2.76% to 16.08%. Yes, you read that right; there is a possibility of getting negative returns even after waiting for 10 years. The worst 10 year returns is -2.80%. This is something no long term investor would find appealing.

These are historical returns and in future they can certainly be higher. One interesting insight on such horrible returns can be based on Elliot Wave Analysis. According Vivek Patil's preferred super-cycle-degree count wave 4 started in September 1994 and went on till October 2005. If this turns out to be correct then Sensex averaged 6.66% returns in a 4^th wave and if we truly are in Wave 5 then we should see spectacular returns for the next 10 years. However, Vivek Patil has also been suggesting a bearish scenario too. So, don’t invest just yet.

If stocks have provided such horrible returns then it is better to invest in other avenues. This brings us to Bank Deposits. To find the returns from Bank Deposit, I needed data and luckily I found it at RBI’s website. RBI data goes backs to 1971. In some years there were minimum and maximum returns. For the purpose of my analysis I used the average returns. I then set about doing the analysis I had done for the stocks. The results are:

Time	1 - 3 Years	3 - 5 years	5-year & more	Rolling 10-year
Returns	8.28	9.08	9.59	10.26
Median	8.50	2.00	1.98	0.92
Std Dev	2.00	10.00	10.00	10.45
Min Return	4.63	5.38	5.38	8.21
Max Return	12.00	13.00	13.00	11.48

As the returns are guaranteed, the Standard Deviation is NOT a measure of risk. It just tells us how the interest rates have varied.

The difference between the stock returns and bank deposits is that in latter you know what you will get. It would be a better idea to look at the returns in the recent years

	Above 5-year Min	Above 5-year Max
1999	10.00	10.50
2000	9.50	10.00
2001	8.00	8.50
2002	5.50	6.25
2003	5.25	5.50
2004	5.75	6.25
2005	6.25	7.00
2006	6.50	8.00

As we can see the interest rates have trended lower. However, it would still have been a better idea to invest in bank deposits in 2001 than invest in stock market for 10 years. It’s only in 2003-2005 that 10-year stock market returns look more attractive.

Recent data from RBI suggests that despite tightening inflation remains high. Moreover, M3 (money supply) growth is still high. As the inflation lags M3 by about 1 year, it is expected that inflation will continue to rise in the near future. This implies that interest rates will trend higher at least in medium term. Currently, ICICI Bank (other banks too) is offering up to 9.5% returns on fixed deposits. It is likely this will trend higher when RBI raises rates. In any case these returns are way higher than average 10-year returns from the stock markets.

It would be prudent to invest a part of your assets and lock in virtually risk free 9.5% returns. In the next article we will look whether investing in stock markets is worth the risk. We will also look into whether timing the market can prove beneficial as opposed to buying regularly. In the meantime, seriously think about investing in bank deposits.