Personal portfolio management options
Investment is an integral part of individual financial management. A certain portion of the amount of money we earn must be saved and invested for reaping benefits in future.
If we continue to spend whatever we earn, there would come a time where we would feel financially handicapped.
There are various areas and avenues of investment, and we must look at each of them individually. We must also understand the merits and demerits of these avenues.
But the important thing to consider here is diversification. This means not to put all eggs in one basket.
Bank deposits
Banks deposits are fixed deposits placed with any bank for a time. They can’t be withdrawn prior to maturity otherwise a penalty will be levied on the depositor.
This is generally considered a very safe investment avenue as banks have never run into default in Pakistan.
During the last 10 years, the weighted average fresh deposit rates averaged around 7%. This means that if any individual invested Rs100,000 in a term deposit 10 years ago and he availed an average deposit rate of 7%, his investment would have grown to almost Rs196,715.
This avenue of investment is safe and secure, but it is not very lucrative as inflation has also averaged around 7% in the last 10 years. Only in the years 2015, 2016 and 2017, the weighted average term deposit rates beat inflation numbers and in those years this avenue could be considered worthy.
Stock market
Stock market on average has remained the best investment avenue in Pakistan in the last 10 years. The index has exhibited a return of 17% on average, which is the best return any other dependable investment avenue could offer.
During the last decade, in six out of 10 years, the index beat the Consumer Price Index (CPI) by a huge margin. But this investment avenue comes with its caveats.
It is largely cyclical in nature. The KSE-100 index exhibited amazing returns in the years 2012, 2013, 2014 and 2016. The returns were 49%, 49%, 27% and 46%. If we exclude these very good years (may be outliers), the KSE-100 would exhibit a negative return of 0.40%.
Therefore, this is a high-risk investment avenue but also offers high returns. The investor in this investment avenue must be educated enough to understand when to enter and when to exit.
Knowledge of individual shares, their dividend yields, and capital gains potential are also important considerations.
Real estate
Real estate is another very sought-after avenue of investment in Pakistan. We will individually consider three price indices (source zameen.com) in this regard.
House Price Index: It has exhibited an average return of 12% in the last 10 years. This return has beaten the CPI by 5% on average and in seven out of 10 years.
Plot Price Index: It has exhibited an average return of 15% in the last 10 years (second only to the KSE-100). It has beaten the CPI by 8% on average and in seven out of 10 years.
Residential Price Index: It has exhibited an average return of 14% in the last 10 years. It has beaten the CPI by 7% and in seven out of 10 years.
Overall property has been a very lucrative investment avenue in Pakistan. Herein we have not included the rental yields which average around 4-5%.
The caveat here is that individuals need to be aware of the authenticity of properties where they aim to invest. The real risk is the risk of fraud here.
It is well understood that real estate is being supported by black money and if somehow this black money stops pouring in we might witness a burst in this boom.
Foreign currency
Interestingly, putting your savings in USD is also not a very bad idea in Pakistan. PKR has depreciated by almost 7% on average in the last 10 years.
In the year 2018, the rupee depreciated by almost 26% and holders of dollars made a killing fortune that year. This has also beaten the CPI in six out of 10 years and is almost as good as bank term deposits.
Gold
Gold is generally considered a hedge against inflation and in six out of 10 years it has beaten the CPI. On average, gold exhibited a 10% return in Pakistan, which is 3% over and above CPI.
The years 2017-2020 were exceptional years for gold with average return of 19% in these years.
According to Robert Kiyosaki, gold is God’s money and will outlive fiat money. We are yet to see this happen but still the glitter of gold cannot be ignored.
We have tried to analyse various investment avenues (although the list is not exhaustive) in Pakistan in the above analysis. We have also highlighted the pitfalls of each investment avenue. It is important to understand these avenues to grow savings through correct investments.
The writer is a banker and teaches economics
Published in The Express Tribune, April 25th, 2022.
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