How to protect your money during times of inflation, currency devaluation

In an era marked by economic uncertainties, protecting your savings is of paramount importance. In Bangladesh, where the current economic condition is a little volatile, it's crucial to adopt proactive financial strategies to safeguard your wealth.

Inflation and currency devaluation are interconnected economic phenomena that can erode the purchasing power of your money. 

In Bangladesh, the rate of inflation has reached point-to-point inflation of 9.93% in October 2023, while the value of the taka has declined against major currencies such as the US dollar and the euro. 

These trends are partly driven by external factors such as global commodity prices, trade imbalances and the exchange rate policies of other countries.

As prices rise and the value of the currency decreases, individuals must take strategic measures to mitigate the impact on their financial well-being.

So how do we protect our hard earned money?

"Whenever there is volatility in the economy, people move on from volatile options and look for stable ones. How do you measure stability? Most people measure stability by looking into the past performance of those assets and whether their value has increased over time," explained Mohammad A (Rumee) Ali, former chairman of AB Bank.

The best way to identify such opportunities is to stay informed about economic trends, government policies, and global economic conditions. Understanding the factors influencing inflation and currency devaluation empowers you to make informed financial decisions. Attend seminars, read financial news, and consult with financial experts to enhance your financial literacy.

What can be the best investment options?

One effective strategy to protect your money is to diversify your investments. Relying solely on one asset class exposes you to higher risks. Diversification helps spread risk and enhances the potential for returns, even in the face of economic fluctuations.

"Since the economy is in turmoil and there are uncertainties, the best course of action for investors is to go for high quality fixed income securities like government treasury bonds. FDRs from high performing banks and NBFIs are also seeing upward movement, so they can also be a good investment opportunity," said Mohammad Emran Hasan, CEO of Shanta Asset Management.

"But investors must ensure they are putting their money in a well governed institution that will be able to return their money," he added.

Treasury Bills

The government borrows from the banking sector by issuing Treasury Bills and Bonds through Bangladesh Bank, based on their fiscal requirements. Bangladesh Government Treasury Bills and Bonds (BGTB) are issued by the People's Republic of Bangladesh where Bangladesh Bank acts as issue manager, clearing agent and custodian for these bills and bonds.

Many asset managers and financial advisors swear by this instrument as the perfect investment, especially for the financially savvy.

"My suggestion would be to buy treasury bills, short term treasury bills. Someone who has the technical knowhow of how to open a BP (Business Participant) ID with the bank can go for it," said Asif Khan, Chairman, of Edge Asset Management.

"Treasury bills now have a profit rate of over 10%, which is higher than FD (fixed Deposit) rates from good banks," he added.

However, this process is a little complicated; it requires financial know-how, something not everyone has.

Fixed income mutual fund

Most experts agree the best alternative to treasury instruments is fixed income mutual funds. Fixed Income Fund is an open-end mutual fund scheme that invests mostly in fixed income instruments, such as corporate and government bonds, and money market instruments (treasury bills, bankers' acceptances, commercial papers, etc.).

"There are asset managers who manage fixed income mutual funds where the client's money is invested primarily in treasury securities. This makes life easier for the client, the asset manager with their skill and knowledge picks the right treasury security with the right maturity for the client," explained Asif Khan.

When investing in a fixed income mutual fund, you have to ensure it is truly a fixed income one. Also, the reputation and the track record of the asset manager managing any mutual fund should be studied before investing.

Traditional route: Land and Gold

Many people consider land as the best kind of asset to invest in. After all, the right piece of land bought at the right price can increase many folds in value. But it is not without its drawbacks. The biggest being the high barrier to entry.

"Suppose someone has Tk50 lakhs or Tk20 lakhs, they can't invest all of it. They have to keep some of it in hand, for emergencies. The minimum amount needed to invest in land is a little high, making it impractical for the average person," said Asif Khan.

For someone not familiar with the intricacies of land purchase, doing due diligence like ensuring they are buying from the rightful owner and other documentation is a  rather daunting process. 

"For a select bunch of people land might be an option. However, when the economy is slowing down, land prices will also come down," Khan further explained.

So what about gold? Another asset traditionally considered great for investing in, since it retains value. Even if the value of taka goes down, gold will retain its value. But there is one big caveat.  

"In Bangladesh since there is no official gold exchange, gold is not a viable investment option here," said Mohammad Emran Hasan.

In the absence of any trusted sources of buying gold coins or bricks in Bangladesh, people go for gold jewellery, which come with their own drawbacks.

According to Asif Khan, "People here invest in gold by buying jewellery, but when you try to sell that jewellery you are paid 15% less than its value. If I lose 15 percent the moment I invest, that is not a good investment."

Fixed Deposit

A fixed deposit receipt (FDR) is a financial instrument provided by banks in Bangladesh which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. But the rates need to be high enough for this option to make sense.

"The FD rate must be higher than the inflation. If it is less than that, you don't get back what you kept. Suppose you keep Tk100 and the interest rate is 9%, but the inflation is 10% at the end of the year, you will lose money," explained Mohammad A (Rumee) Ali.

Most people are also unaware of which banks are the good ones.

"FDRs can be a good option but people look for banks that provide the highest rate; but their money might not be safe in the bank that offers the best rate," said Asif Khan.

"And in mutual funds there are taxation benefits. Investing taka 5 lakhs in mutual funds gets you some tax rebates; here mutual funds are more attractive than FD. So, if I get better returns by lending government money than FD, then why would I go for FD?" he added.

Stock Market

The stock market is the go to place when it comes to investing all over the world. But the market is volatile and is subject to all sorts of economic forces. Particularly in Bangladesh, the stock market seems to be in a rut and investors don't really seem interested. But savvy investors can still make good.

Nasif Tanjim. Illustration: TBS

"In the capital market due to the overall market situation and negative vibe, shares of some good companies are currently valued like the not so good ones. Some blue chip companies whose share prices are now low can be a good long term investment. But people should only go after them after proper research," explained Mohammad Emran Hasan.

The don'ts

Experts agree that you should not keep money sitting idle at a locker in your home. "If someone keeps money at home in cash form, they are not getting any return. On top of that, the interest rate is also going up. So their wealth is coming down. So if someone doesn't feel safe keeping their money in the bank, they can look into National Savings Certificates," advised Mohammad Emran Hasan.

Do not spend beyond your means in these trying times. Try to reduce your expenses by cutting down on non-essential items. This can help you save more money and avoid paying high interest rates on loans.

Experts also advise against going for investment opportunities that seem too good to be true. In most cases, they are either scams or illegal, which could not only lead to losing your hard earned money but might also have legal repercussions.