There Seems to be an amazing rush to grow money by investing in Fixed Deposits (FD) and other fixed income schemes. Someone recently asked me about the best safe investment option for the future and after some discussion I realized what he really wanted to know was the safest scheme within the sphere of fixed deposits in India.

That is the level of risk aversion for some investors. The idea for a lot of such investors is capital preservation more than growth. There is nothing wrong with that. In fact, safety of principal should be of prime importance when analyzing any investment option. Further, in a country like India where fixed deposit rates are as high as 8-12%, it is indeed a very tempting prospect to park your money in fixed deposits. To add to this, given how equities have behaved over the past 5 years, I don’t blame anyone for being so opposed to the idea of growth.

What I can say with absolute certainty though is that those who are trying to preserve (or grow) capital by investing in fixed income products today, will wish they had invested in high quality stocks, in 5 to 6 years from now. Mark this post!

It’s all cyclical. The funny thing is that everyone knows this – it’s all cyclical.

Yet people invest in stocks at the peak of the euphoria and move to fixed deposits after a stock market crash. Couple this with the fact that (I don’t doubt) everyone knows that (i)  inflation eats into FD returns, and; (ii) that fixed deposit interest is taxable unlike long term capital gains and dividends, on stocks. Yet, the world is filled with hose who sell ICICI bank shares and use that money to invest in a fixed deposits with the same ICICI bank.

It reminds me of the scheming Jeremy Irons talking about economic cycles and the great financial crashes in the film Margin Call (if you haven’t seen it yet, I highly recommend this one):

Now excuse me for sounding a bit brazen – but if you can’t find value in these markets, you may never find it. Recessions happen and so do the booms. It is not hard to figure out what will come next, and if you are still looking for capital preservation and a guaranteed return and you do not worry about inflation eating into those returns, you may well look at fixed deposits. But if you want to grow your capital, then buying shares in businesses with sound fundamentals with even the most ‘moderate’ potential for growth in current market environment will give you superior returns over long term than any fixed income scheme.

For months, may be years now, many are waiting for the markets to enter a bull phase before they commit any money to equities. Rarely do markets give you a chance to buy at the lowest levels or sell at the peak. They do however present opportunities. Of course these opportunities benefit investors on a first come first basis. Those who spot them early are rewarded far more than the others.

My final word – It’s time to start moving money to high quality undervalued stocks.