Demonetization and its Impact on Personal Investment Portfolios

In the movie Chak De India, the coach has been ousted by the team as he demanded unity from them for a focused, winning game and they have not been used to this approach. While they have voted the coach out, somewhere deep down they realize that it is not right. At his farewell party an event of eve-teasing sees the team standing up to fight it. That event acts as a trigger to get them united. The coach says, “Team banane ke liye taakat nahin neeyat zaroori hai….” (to make a team more than strength you need intentions). That is what the current move of demonetization has done to India. The government has shown the intention to clean up the system knowing that it will create havoc in the economy in the short run. It would not have been an easy decision, but someone has to get the job done and the current government has shown that they can do it.

Till date we as common people were surviving and making do with whatever the government offered us. It is the first time in the history of independent India that the support of the nation has been sought to make the system better. And for the first time the government and the common man is making a team. That is probably the reason for the unprecedented support from the common man for this move inspite of the associated difficulties.

We do not know how the entire thing will pan out in the future, as there is no precedent of demonetization on this scale in the country. For many people this could be worrying times in terms of their investment portfolio which could have various holdings ranging from fixed deposits, real estate, bonds, gold and equity. So what is to be done now?

Fixed Income instruments:

The rates in instruments like fixed deposits, bonds, PPF, Sukanya Samriddhi Account , Senior Citizen Savings Schemes (SCSS) are largely dependent on the demand-supply of credit in the economy. In case of fixed deposits which are offered by banks, the bank takes the money from you, promises a particular rate of return for a specified period. Then after recovering their operational cost and profit margin, they lend it to borrowers in forms of retail or corporate loans. When there is a healthy demand for loans, the banks would want more deposits to come in so that they can lend more. So they offer higher interest rates. Conversely when the loan demand is lower, they will reduce the interest rates. In a situation like today where there is huge cash inflow in the banks, they have so much money that they are not able to lend out. Hence they cannot give a higher interest rate and you get low fixed deposit returns.

In case of bonds, you are either lending to corporate or to the government whenever you buy their bonds. Both the entities will give a higher interest rate when they need money for expansion of business (capex- for corporate) or for infrastructure or other development for the country (government). The corporate will always look for the cheapest option to raise funds. If they are getting lower rate from the banks they will go there and not offer bonds to public. But if banks are charging higher interest rates or loans to them, or are not lending at all due to compliance requirement to certain sectors, they will approach public with bonds offering higher rates. When the Reserve Bank keeps changing interest rates in response to various factors like inflation, monsoon, currency fluctuations etc, it impacts the price of bonds available in the markets.

In the current scenario the bond yields are down, that means the prices of bonds have gone up. This is a peculiar situation where due to the heavy cash inflows in the banks, they have to increase their bond purchases. The banks need to maintain 21% of their total deposits in the form of SLR (Statutory Liquidity ratio) with the Reserve bank at all point in time. So because higher demand and lower supply of government bonds from banks, the prices of bonds have gone up and the yields have come down. So essentially if you as an individual investor go to buy a bond today you will have to pay a higher price to purchase the bond as compared to a few days back. In case of mutual funds that hold bonds of varying tenures and types, those with higher exposure to G-Secs (longer tenure government bonds) would show fantastic returns. Those funds that hold bonds that pay interest will continue to give decent returns based on the accrued interest. The price of these bonds might fluctuate in line with the interest rate movement in the market, that means you might make a capital gain or a capital loss depending on which way the bond prices move.

The rates on small savings instruments (PPF, Sukanya Samriddhi, SCSS) have been linked to the 10 years G-Sec yield. Technically there rates need to move in tandem to the G-Sec rates every quarter, but we have not seen action with that regularity, yet. With the government now having cash surpluses, it is likely that they would be reduce the rates on the small savings which are much higher than bank deposits.

Real Estate

The hardest hit segment due to demonetisation is probably real estate. This is the sector where most of the unaccounted money transactions happen in cash. So there would be many people who are stuck right now with hordes of cash made while selling properties, or cash held in anticipation of buying properties. Due to this uncertainty, the demand for real estate is likely to fall. It will be worthwhile to keep an eye for good deals if you are looking to buy property for your own use. But it would be wise to not jump in immediately, but wait and assess the situation before making a final decision. It would also be advisable to buy ready- to-move properties, as it is quite likely that many projects will be stuck for want of cashflows.

For those who were looking to sell real estate for funding some big goals, this will be a difficult time. They will have to look for a “Plan B” to meet their goal requirements as they are likely to find it difficult to negotiate a good deal for their properties.


We have always said that gold is a personal use item and more of a cultural norm. If taken as an investment it should ideally not exceed 5-10% of your investment portfolio. It would be wise to keep the investment portion on electronic or paper gold, rather than physical gold.


We have an extremely small base of equity investors in the country. Majority of the population still sticks to small savings or fixed income instruments for bulk of their investment requirements. With demonetisation there is already a fall in the interest rates, so many people would be looking at better investment avenues. Also there will be several small companies, chit finds etc which would wind up because of this move. Hence the loss or fear of loss will also make some people move to the more organised sector for investments. With the move towards a less cash society, we might see the tax base widening as well, as the income will be routed through bank accounts. This is further likely to reduce tax rates in the long run.

All this will bide well for equity and related instruments. We have already seen many new investors coming to the fold of mutual funds, especially equity related funds. They should get good returns from their investments as the economy stabilizes and grows stronger with cleaner money, smaller parallel economy (black money economy will exist to certain extent, as greed never goes away), companies doing better, newer jobs coming up and higher demand from the local markets for goods and services.

A word of caution here, for those looking to make a quick buck on the equity market, it would not be a very good idea.


As an investor your primary job now is to have a relook at your personal investment plans. For those who have goals which are more than 5-7 years away, they can continue their investment plans based on their individual asset allocations. SIPs and STPs can continue for wealth creation. If you invest in stocks directly, you can pick companies with strong fundamentals for the long run to enhance your portfolio.

For those that have important goals coming in the next couple of years or retired investors who are drawing incomes from their investment corpus, will need to look at their preparedness for goal amounts and incomes respectively. There might be a need to change the investment mix if any of the requirements are getting compromised.

All in all, the short term (1-2 years) look volatile while the long term looks brighter than ever before. As a caveat, these are views on the present situation. As it unfolds, the views might change.