Author: P.V. Subramanyam

If your biggest buyer buys 80% of your production, he can control price. Economics 101.

So P Chidambaram, the single biggest borrower wants to reduce borrowing costs. Nothing funny or odd about this, right? Well he borrows in many, many forms - and Indians (like many people around the world) LOVE 'government guaranteed' kinda words.

So NSC, PPF, KVP, other postal schemes, and the greatest of them all commercial banks have tons of money coming in at 8% or 8.5% pa. Now if RBI reduced interest rates, more money will flow into government schemes. However there will be pressure on the govt to reduce interest rates on its schemes - which it will not do anyway! When the pressure becomes too much they do increase the interest rates a little bit, but that happens once in 5-6 years unlike a bond offering that adjusts to market every time there is an issue.

So what do you do if you are a saver? Life is difficult indeed. Your corpus has to be so big that interest rate drops or stagnation does not bother you. So if you need to live off your corpus you need to target a corpus size so big that a 3-4% yield is what you can live on. This is specially true if you are planning a 35+ year drawdown! Not easy at all.

Hence it is necessary to either have real estate in a nice location (making it attractive for a young educated couple to want to live there) so that you get a 7-8% growing rent. On the other hand you could have an excellent equity portfolio - where again you do not touch the PRINCIPAL till you reach 70 years of age. Assumptions like living age of 85 or thereabouts could also go haywire - and if that happens YOU again need a fall back. Hence a portfolio combination of rent, interest, and dividends is safer than a pure debt portfolio.

Remember the biggest borrower CAN control the interest rates - and this is criminally LOADED against the small saver. Sigh, alas. Of course there are some rotten companies accepting Fixed Deposits (there are people who love rated instruments, my views on ratings is - it is a joke)…for me these companies do not matter for MY MONEY. My debt is in PPF, bank FD, and SBI’s quoted debentures.

P.V. Subramanyam is a financial domain trainer and can be contacted at         pv.subramanyam@irisindia.net

The author also runs a blog - www.subramoney.com