On the eve of 9th November 2016, Mr. Hari Kumar, a textile trader from Ahmedabad, was on his way from Mumbai to Ahmedabad, when he got a news notification on his mobile which left him awestruck. He could not move his eyeballs from the mobile screen which said, "Rs 500 and Rs. 1,000 notes will no longer be a legal tender". Mr Kumar was on a rampage, calling people one after the other, he was worried. Hari reached home later that night and asked his wife and mother to dig all the 500 & 1000 currency notes from all the nooks and corners of their home. The next morning, Hari went to his shop to gather the old currency. The old currency in Hari's home and office totaled Rs 7 lacs. He asked his father and brother for suggestions, and after a long discussion, they concluded: Deposit Rs. 2.5 lacs each in Hari's and his wife's saving account and since his mother did not have an account, they would open a new savings account in her name and deposit Rs 2 Lacs in that account. Hari's wife would be added as a Partner in his business, and she'll be a separate taxpayer. They would invest Rs 2 Lacs in tax saver FD's and the rest they would keep in their saving accounts.
Hari needs a professional helping hand as the decisions he took might not be in his best interests. Hari & many more like him are taking wrong decisions post the Demonetization announcement, and you must guide them right in the need of hour.
Since common people like Hari are depositing their cash in their accounts, the banks are enjoying a cash surplus. As a result, major Indian banks have cut their fixed deposit rates and further cuts in both Saving and Fixed Deposit interest rates are expected. Hence, people's money that is lying in saving accounts or in fixed deposits is not doing justice to the depositors, by generating lower returns for them. As a financial advisor, you must see that your client's money is invested in the best possible investment product, and he is getting the maximum returns on it. Money lying in saving accounts are giving a return of about 4% per annum, which does not even cover the cost of inflation. You can help your clients by diverting their money from saving accounts to liquid funds. Liquid funds will give them the comfort of a saving account and returns of around 8-10%.
It is worth noting, that there are a number of people who intentionally or unintentionally have become a part of the grey economy. There are ladies who are doing small businesses from their homes like chocolate making and are earning well, even upto Rs 50,000 a month, but their sale proceeds is in cash and the business is not registered. So, they are not reporting any income and hence are not paying any tax. Similarly, many small shopkeepers are dealing in cash and never bothered to file returns or pay taxes. All of them and many more have to resort to online payments and receipts to carry out their business smoothly in view of Demonetization. Hari's wife or the chocolate lady, or the small shopkeeper, or many others; there will be an increase in the number of taxpayers in the country, who will be reporting incomes and will try to save the maximum by investing in traditional methods of saving taxes like PPF, Bank fixed deposits, etc. These instruments will fetch a return of around 7-8% per annum and there is a lock of 15 years in case of a PPF and 5 years in case of an FD. ELSS mutual funds is a boon for such investors as it exhibits the lowest lock in of three years and the average rate of return of ELSS schemes in India in the past 5 years has been 17.06%, more than twice of what is offered by FD or PPF. (Source: NJ Research; Average return of 32 ELSS schemes as of 30th Sept 2016)
The citizens of India are in awe, post the Demonetization announcement, and it is your responsibility as an advisor to help them in their financial matters and not let them take wrong investment decisions. Demonetization is an opportunity for the people as well as for the advisor fraternity.
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