The interest rates have started their southward journey and are creating
new nadirs with every passing day. The debt instruments strategies needs to be
analysed and the key component of this basket is “Bank Fixed Deposit”. The best
part of the Fixed Deposits are liquidity, safety and reinvestments which
allures the investors towards them but the lower rates are a deterrence for
investment.
The Bank FDs currently quotes in a range of 7.75% to 8% at their peak and
one can add another 25 to 50 bps for senior citizens. The rates will further go
down if one factors in the tax rate which is applicable as per the tax slab the
investor falls in. If we further factor in the average inflation of 5% to 6%,
we eventually get a negative return on our FD investments.
Liquidity,
Reinvestment and Safety
Bank FDs are definitely liquid and can be broken as per your convenience
but this comes as a cost of lower interests as a penalty because of pre-mature
withdrawals. Reinvestments at a lower interest rate will impact your financial
goals which depends on time horizon and risk profile. Shifting for few enhanced
interest rates bps in another bank will not yield any rich dividends. The 1
Lakh Rs safety of savings are not that big impetus for choosing a bank for
investment.
Alternate Investments
One
cannot deny the safety of Fixed Deposits but the lower interest rates are big
turnoffs and thus one should explore and evaluate other options which are
relatively safe and outscore the FDs in terms or returns and provides a better
tax advantage.
If
the fixed deposits are arsenals of the long term financial plan: PPFs, Tax Free Bonds and Sukanya Sammradhi
Yojna (for the girl child under the age of 10 years) are superior options with
a phenomenal tax advantage. They fall in the Exempt-Exempt-Exempt (EEE)
category with no tax applicability at investment, intermittent income streams
and redemption stage.
For the short term perspective
with a time horizon of 3 years and above, one can invest in ultra- short and
short-term debt funds or FMPs. Arbitrage Funds can be ideal investment options
for 1-2 year timeline. These investment paths are not popular because their
returns are not guaranteed and are market linked, which is subject to
volatility to a certain extent.
Risk Profile also matters
In addition to the time
horizon, the investors risk profile is an important factor. If one can take
moderate risks, Monthly Income Plans and Corporate FDs are also good investment
candidates which yield better returns vis-à-vis the traditional low risk
instruments. In corporate deposits, investors should focus on top rated
deposits but with the higher rates bounty, premature withdrawal can be a tricky
situation.
MIPs have an equity flavour
in them along falling in a range to 10% to 25% along with debt instruments.
Systematic
Withdrawal Plans in MIPs and debt funds are good bets for those who have
periodical funds requirements. The investors get monthly or quarterly funds either
on a fixed mode (fixed withdrawal) or on appreciated mode (only withdrawal of
the appreciated funds)
To
sum up, the investment pattern should change with the changing times. The
inflationary scene will grow with times and thus one needs to amend the
financial plan accordingly for a secure and prosperous financial feature. One
should choose an investment option which optimises returns, ensures liquidity
and minimises tax without compromising on safety.
Other
than FDs which other investment options you will choose for higher returns and tax
advantages?
The article has been originally published on Finalaya.com
No comments:
Post a Comment