Double Edged Sword 🗡 Of Products Like Naya Pakistan Certificate

I was happy to see many people getting worried about their fixed income 🪙 portfolio of NPC (Naya Pakistan Certificates) in PKR 🇵🇰 denomination with recent currency devaluation spree in Pakistan – as at least people understand the inherent issue these instruments bring. However, people with USD 🇺🇸 denominated certificates were not moved as they had the hedge against devaluation – however those depositors should be worried too.

In this write up i shall discuss why fixed income instruments like bonds, bank deposits, government issued certificates etc are double edged sword for anyone who pursue them for long term basis. Be it USD, PKR or any other currency of holding!

Before I begin writing about the topic, please make sure you attend the live YouTube 📺 stream on 10th April 2022, 11 PM Pak time – you can set the reminder by clicking here.

There are 2 distinctive issues with having fixed income instruments specially if invested over a long term commitment:

1. Their inability to beat inflation.

2. The false sense of security leading to complacency and eventually not learning how to invest.

The first point is bang on 🎯 target – whichever country you are in, the fixed income provided by the government will barely beat inflation (if at all) – and problem with the 3rd world countries with devaluation 📉 is that it will erode most of the gains anyways made through such instruments. Consider the case of Pakistan, where if the PKR NPC is providing 11% returns and inflation in pre COVID time stands at 8-9% which has now gone up to 12% recently – the returns are simply not keeping up with inflation [BTW, this indicates that the government should increase the rates for NPC soon.]

Lets take the example of Uncle Sam 🇺🇸, here is the chart 📈 of average inflation in US for the last 10 years vs the 10 years bonds yield – you can see how fixed income is just barely beating the inflation – and in the last couple of years the inflation is spiraling out of control too and hence we can expect bonds yield to be increased soon (along with interest rates):

Secondly, the false sense of security surrounding the fixed income will make the individuals complacent 🥱 and the urge to improve the investment returns die down under security bubble. The biproduct of this complacency is that the person will stop thinking to improve the investment techniques and erode their wealth overtime. Even the NPC of 6% return in USD terms can become an instrument of laziness if not invested with a proper plan.

Now, its not that the fixed income is always bad! There are scenarios that the fixed income might be the only or best choice in the given situation. Two such scenarios are mentioned below:

1. 3rd world countries like Pakistan has good government initiatives from fixed income point of view for senior citizens 👴 giving them best returns compared to any scheme in the country with lower taxes. Although this is still not the best of solutions to invest, but considering minimal social security provided by the state and lower risk appetite for the seniors (along with minimal financial knowledge) these schemes are by far the best for this age group.

2. Second instance where fixed income makes sense is when someone has a short term goal 🥅 (around 2-3 years) for certain big ticket expense / investment like buying a house, planning for a wedding or nearing the time to send kids for higher education – these short term goals also warrant for a fixed secured short term investment. You don’t want to gamble with your immediate need money 💵 to be invested in a place like stock market which can remain at lower levels for years at stretch.

So there are some scenarios where the fixed income can be a viable solution, but majority of the time if you dont have a plan of action, the fixed income will deplete the wealth. It is important to take care of your investment journey based on your goals – remember, one size doesn’t fit all.

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