INFLATION in Bangladesh has recently skyrocketed from its average value of 5 per cent to around 9 per cent within just a few months in 2022 and has not seen a meaningful downtrend since. According to a report published by SANEM about a year ago, around 90.2 per cent of the lower-income earners changed their food consumption habits, 96 per cent reduced meat consumption, 92 per cent reduced cloth consumption, 45 per cent had to reduce children鈥檚 education expenditure, 55 per cent erosion of savings took place, and around 35 per cent were using their savings to survive through this high inflationary era that the country is going through.
Despite these reductions in consumption habits, as a poll by the same organisation found, the consumption expenditure of the respondents rose by around 13 per cent, with their income remaining where they were. The scenario for middle-income people is no better, either. A news report quoted a middle-income family鈥檚 dire financial conditions and indicated that the family was living on Tk 8,500 that it received from the government savings certificate along with the monthly salary of the only income earner of the family, but the rising price of the commodities had eventually forced the family to make the decision to sell their savings certificates just to survive.
To make things worse for people like them, government savings certificates had seen a reduction in interest rates. Therefore, having a meaningful secondary source of income became crucial for them to survive and lead a comfortable life. But how does one earn this secondary income? The answer lies in the careful choice of investment instruments.
Investment in financial instruments with growing potential to compensate for the level of risks involved not only ensures the growth of wealth but also secures secondary sources of income. The question then becomes: where to find such a lucrative and meaningful investment opportunity? To begin with, we will refer readers to the basics.
There are primarily two broad ways of investing: fixed-income instruments and equity instruments. For beginners who have just started earning, a deposit pension scheme is often the first step to saving and investing. Now, DPS offers interest rates ranging from 8 per cent to 10 per cent, which can significantly boost wealth accumulation. Moreover, DPS provides tax benefits, serving as a tax rebate investment for up to Tk 1,20,000.
Another investment instrument to consider is the national savings certificate, a high-yield, risk-free government-issued instrument that offers regular cash flow to investors. Investors can invest in national savings certificates through the postal office, the national savings bureau, or commercial banks. While most commercial banks may not offer this service, banks like EBL, City Bank, and BRAC Bank provide it to their clients. National savings certificates also offer tax benefits, serving as a tax rebate investment for up to Tk 5,00,000.
Additionally, the AIT deducted at source is considered the final tax. However, there is an investment limit of up to Tk 5 million for these instruments. In addition, as we already discussed above, the interest rate on this instrument has recently dropped. Hence, despite their lucrative offer of interest, these instruments are not capable of offering meaningful returns to the holders any more given the sticky, high inflationary scenario of the country.
Alternatively, investors can also explore other risk-free instruments, such as treasury bills and treasury bonds, which typically offer lower returns than bank fixed deposits but currently provide the highest possible return through fixed-income instruments.
Returns range from 11.65 per cent to 12.78 per cent, with maturities ranging from three months (T-bill) to 20 years (T-bond). These investments can be made through the treasury department of a bank by opening a BPID or through the BOID of a brokerage firm for T-bonds. Investors can also invest in T-bills and T-bonds through merchant banks, which provide a seamless and faster customer experience. Investing in T-bills and T-bonds also provides tax benefits, serving as tax rebate investment instruments for up to Tk 5,00,000.
While fixed-income instruments offer cash flow opportunities, they may not necessarily meaningfully pull investors鈥� wealth up. To achieve meaningful wealth growth, investing in equities is essential. However, analysing the risks of these investment opportunities is also crucial prior to making an investment decision. Equity investment can be done through brokerage houses like IDLC Securities, BRAC EPL Stock Brokerage, or through merchant banks like Prime Bank Investment and BRAC EPL Investments, which offer margin as well as non-margin facilities to the investors in the capital market.
When investing in stocks or equity, investors should consider three additional key factors apart from their risks. They are the financial fundamentals of the company, along with their governance practices, timing of the investment, and being informed about internal and external factors of the concerned firms.
However, appropriate financial literacy to understand the risk-return and other relevant dynamics of an equity investment, as mentioned earlier, is inevitable for all investors willing to invest in the equity market. In addition, consistent updates of the market also require investors to invest their precious time to conduct relevant research on the capital market of the country. If investors do not possess such time and knowledge, they can also take a guided tour by investing in the market through mutual funds.
Mutual funds also provide better diversification than portfolio investments made by most investors in the market in view of the market price and transaction costs involved in creating a diversified portfolio. However, while investing in mutual funds, investors should consider the performance of the concerned asset managers of the funds. IDLC Asset Management, VIPB Asset Management, and Edge Asset Management are among the top-tier asset management companies in Bangladesh, given the performance of the funds they manage.
Some merchant banks, like IDLC Investments, Prime Bank Investment, or BRAC EPL Investments, also offer managed portfolio services for those who lack the time and knowledge to invest in equity securities in Bangladesh. Investing in the capital market also offers tax benefits, with no cap placed on investments to be considered for tax rebates.
The highest tax benefit can be achieved through investing in zero-coupon bonds, ZCBs, as the returns are tax-free. Currently, there are several ZCBs available in the market offering competitive rates of return, such as the National Housing 1st Zero Coupon Bond, Renata 1st Zero Coupon Bond, and SAJIDA 2nd Zero Coupon Bond, which have rates of return of 9 per cent, 10 per cent and 11.5 per cent, respectively.
In addition to ZCBs, there are a few other corporate bonds available for general investors, including perpetual bonds issued by different banks and Islamic bonds (sukuk) listed on both the Dhaka Stock Exchange and Chittagong Stock Exchange Limited. Currently, only BRAC Bank PLC is giving the general investor the opportunity to invest in BRAC Bank 2nd Subordinated Bond through private placement. It is a seven-year bond providing semi-annual coupon payments with a higher rate of return than FDRs (as there is a 3 per cent margin over the average rate of six months鈥� highest fixed deposit rate of private commercial banks). An investor can invest in this bond by visiting any BRAC Bank branch or BRAC EPL Investments head office in Mohakhali. However, corporate bonds do not provide tax benefits except for lower AITs (5 per cent instead of 10 per cent for FDs). FDs, as most investors already know, are also investment opportunities suitable for those requiring liquidity.
Lastly, insurance policies provide a risk transfer strategy for individuals, offering a financial cushion in case of death or other unfavourable circumstances. Companies like MetLife and Guardian Life offer different life insurance solutions.
Interestingly, the investment instruments discussed above do not only offer investment opportunities to the investors but also offer financing solutions to the borrowers or issuers. It is important to remember that firms operating in an economy are net borrowers. Hence, a vibrant market for financial assets also ensures better availability of funds for companies, enabling them to expand their business operations and contributing to the economic growth and overall economic development of the country.
听
Shah Rakib Khan is head of primary market, BRAC EPL Investments Limited. Md. Kamrul Bari is adviser of finance, accounts, and administration at Nodes Digital Limited and adjunct associate professor at the Uttara University and adjunct faculty member at the United International University.