Saturday, February 5, 2011

SBI FDs vs SBI Share vs Banking ETFs / MFs

This post is specially for those , who call share market a Game of gambling .
First a bitter fact for fixed deposit lovers.
If you bank (SBI) goes bankrupt then RBI is liable to pay at max 100000 to you irrespective the amount you have in your bank account or in  FDs.

Thanks to RBI and various strict monetary policy in India , It is bit difficult for banks to fail and go bankrupt in India. So Fixed deposit with SBI  are safest bet no doubt . However  in my previous post Safety Vs Return , we saw that over the period of time purchasing power of the money goes down ,if inflation is high,  or remain same or just little higher , if inflation is low.

Another interesting think with banks that in good or bad times they retain their values , the products they offer are most desirable and like commodity. We need banks products in any case and pay them fees for their services.

They can increase or decrease the interest rates on FDs and Loans as per the current economical scenario in country.

In this way they have predictable business and revenue stream , if economic is blooming their EPS will rise .
If economic is going down their EPS fluctuate very less and thus retain their value of shares.

Whereas in other sectors like IT , Auto EPS of companies comes down drastically and thus value of their shares because very low business truns in low revenues and may be in loss some time .

Think @ TCS having 100000 engineering not at all working on any software in recession time . Company has to pay their salaries , maintain the various infrastructure . No business .

Bank reaps profit from growth in any and all sectors . Because for all operations and expansions companies need money which comes from banks. If employees are getting better salaries and stable job they save more with bank or take more loans and in turn adding value in EPS for bank.

Banking is all season business and mostly it is very profitable .

In next 20 years , Indian will see growth in rural economics and mobile banking boom which will add tremendous growth in banks revenue.
Are you tempting for opening your own bank and start banking business ??? Very tedious and complex business . Why not you participate in the business by buying shares of SBI or other PSU banks . The safest business of money.

When you buy shares / MFs /ETF of a sector you just invest money in business and outsource every operational function to those companies .

You can't start business with 20000 rupees or 1000 rupees per month.  But buying MF /Shares of a company at right value provides same or better opportunity  for which you need initial investment of lacs and crores.

Read my next post to identify best companies.

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