Did you know that in Japan, Denmark, Switzerland and Sweden, you need to pay the bank to park your deposit. In other words, you get a lower amount than the principal on maturity of the deposit. Isn’t it absurd? But, this is exactly what happens when a country has adopted a negative interest rate regime. About a quarter of the world’s economy today lives under negative interest rates. This critical measure is usually adopted to spur economic activity when inflation is either near zero or negative so that people spend rather than save money with a bank. The spending is expected to give a boost to economic growth.

We Indians, who park most of our savings in traditional assured returns products cannot imagine such a situation. Though negative interest rates may not be a concern for the time being, there is certainly a concern about declining interest rates. The graph below indicates the decline in term deposit rates from double digits in the late 90s to 7% levels now. India is not an isolated case of such steep decline in interest rates. The USA too had double digit interest rates in the 80s but as the economy developed, interest rates declined and are currently below the 2% mark. The point therefore is whether we are prepared for eventualities like further decline in interest income from traditional avenues (like seen in the US example).

What are the options? Declining interest rates provide cheaper financial resources to the industry which in turn can help them reduce costs. This can further help increase demand for their products and boost economic growth. A good corporate performance is generally reflected in the growth of the equity market. As a stock holder of such companies you can become a direct beneficiary of the outcome. The challenge, however, is to choose such companies. Welcome to equity mutual funds! By investing in equities through the mutual fund route, investors could reap the benefits of professionals choosing these companies as well as benefiting from their higher returns potential.

However, your investments in equities through  mutual funds cannot make you wealthy overnight. You need to remain invested for the long term to reap the benefits of wealth creation over a period of time. You can put aside Rs.500-Rs.1000 or more each month in a Systematic Investment Plan or SIP and start your equity innings. To conclude, though Indian savers may not need to worry about negative interest rates like the Europeans, they may also look at avenues like SIPs in mutual funds to compliment interest income from traditional savings.

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.