Troubled times: Here are some safe investment options
Not every one will have the courage to buy equities in such choppy markets. Definitely not the retail investor. So does the retail investor have any safe options at all? Actually you do.
"Be fearful when others are greedy. Be greedy when others are fearful," said Warren Buffett. The Indian financial markets have been choppy from May. The rupee has been volatile in the 65-68 range and fears of higher inflation have sent domestic gold soaring. There is fear in the market, and if you go by what Buffett says, this is a good time to buy equities. But not every one will have the courage to buy equities in such choppy markets. Definitely not the retail investor. So does the retail investor have any safe options at all? Actually you do.
Fixed deposits: Banks' fixed deposits (FDs) are the safest options you have in such times. Currently, a one-two year FD offers a rate in the range of 9.10-9.50 percent and 3-4 year FD 8.75-9.25 percent. Tax-free FDs with tenure of more than five years fetch you 8.25-9.25 percent. Though bank FDs are the safest bet, your post-tax returns may not be too impressive, especially if you fall in the highest tax bracket. You get around 6.9 percent post-tax for those in the highest tax bracket if FD rate is 9.50 percent. Bear in mind that you will have to pay a penalty usually for pre-mature withdrawal.
Company fixed deposits: Many manufacturing companies, non-banking finance companies (NBFCs), housing finance companies (HFCs) and government-owned companies raise money through such fixed deposits. Company FDs give you a higher rate of return than bank fixed deposits, usually 2-3 percentage points higher. The tenure for these FDs is from a few months to a few years. Investing in company FDs give better returns but the risk is higher. Ideally, invest in these FDs with a lower tenor of up to one year. Always check credit rating of the paper you want to buy. Do not invest in a paper with a rating lower than "AA". Income tax is not deducted at source for deposits up to Rs 5,000 and on interest income up to Rs 5,000 a financial year. If you look only from the returns point of view, people in lowest tax bracket, will benefit the most from these.
Tax-free bonds: A slew of tax-free bonds (TFBs) is expected to hit the market soon. The first to come out has been Rural Electrical Corporation (REC). These bonds are tax free becasue interest earned from them does not form part of the total income. When you sell the bond on the exchange, you will have to pay capital gains tax, though. The post-tax return you earn on this bond is better than what you would have earned for a fixed deposit. The coupon on these bonds are linked to the government securites market, where the prevailing economic uncertainties have pushed up yields. Hence, the current bond offer is giving better rates than last year's offer. For retail investors, REC bonds offer a annualised coupon of 8.26 percent, 8.71 percent and 8.62 percent. We highly recommend these bonds for risk-averse, long-term investors. Keepin mind, you will be able to trade these bonds on the exchange. But, getting a buyer for the bonds may turn out to be difficult as it depends on the market conditions then.
Non-convertible debentures (NCDs): NCDs are debt instruments issued by companies as part of their fund raising. They have a fixed tenure and pay out interest monthly, quarterly, annually or even at the end of the tenure. There are two types of NCDs - secured and unsecured. Secured NCDs come with slightly lower risk, since they come with some sort of assurance that if the issuing company defaults on payment, you can claim it from the company as per law. Unsecured NCDs don't have any such assurance. Invest in NCDs with a high AAA rating. Most NCDs are listed on the stock exchanges and available in the demat form. This makes NCDs liquid, but only to an extent, as volumes are low and it may be difficult to find a buyer. Currently, NCDs are offering interest in the range of 10-14 percent per annum.
FMPs: If you are looking for short terms returns, fixed maturity plans (FMP) offered by mutual funds are an excellent option in the current market scenario. They carry lesser risk and work well for risk-averse investors. FMPs are debt instruments which invest in various debt instruments such as government bonds, company bonds, CDs, CPs, and the like. Currently, FMPs could give you around 10 percent post-tax returns for tenure of one year. FMPs are also available with maturities of 15 days to 5 years. In fact, they are also tax efficient. FMPs maturing after one year are taxed as long-term capital gains, with an indexation benefit in the growth option. Keep in mind that FMPs work well for those who are in the highest tax bracket.
These are just a few investment avenues for your consideration during these difficult times. Planners we spoke to also said ultra-short term and short-term debt mutual funds are also good option. As well as fund of funds MFs, which invest in overseas US markets, help you make the most of the falling rupee. Ensure that your overall debt portfolio has a mixture of the above mentioned instruments, based on your individual risk profile and time horizon.
Like the name suggests, it's a credit card. But unlike a regular credit card which is an unsecured debt, here the bank asks you for collateral or a security before giving you a card.
Rajiv Gandhi Equity Savings Scheme has been launched with the objective of encouraging savings of small investors in the domestic capital market.