The Government of India
further reduced the rates on small savings instruments by 0.10% w.e.f. 1st
July’2017. We have witnessed PPF
interest lower than 8% for the first time. Term deposit rates are also around
7% for period up to 3 years. Bank fixed deposit rates have also fallen to
6.5/7% from peak of 10%. Traditional fixed return investors are in confused
state of mind and are worried where to park the fund which can give them good returns.
Before that you need to
understand where the core inflation is moving. The movement of inflation decides
where the interest rate will move. CPI inflation has softened from the peak of
10% and at present it is around 2% only. Experts fear that CPI inflation for
the month of June’2017 will be lower than 2% and hence it is very much possible
that rates may fall further in coming months. Post demonetisation we have seen
a lot of changes around us. The prices of food grains, pulses and vegetables
have fallen sharply. Construction activity has been also affected. Crude oil is
also trading at around $45 a barrel. Rupee has also appreciated against the
dollar. All this has lead to sharp fall in inflation in recent past. We should
also note that RBI’s current financial year’s inflation target is 4%. RBI’s
stance for repo rate is at present neutral looking at international events and
also possible jump in inflation post GST roll out but a rate cut is not ruled
out in next review meeting.
Before starting any
investment investor should finalise the goal for which they are investing. Goal
based investment always help you in deciding the right avenue for your
investment. The investor should stick to low risk investment avenues when the
duration available is lower say less than 3 years. For a time horizon of 3 to 5
years they can take little risk and for the investment for 5 years plus
investor can take higher risk products like balanced and equity funds of mutual
fund. The second most important thing investor should look at is post tax
return and not the gross income or interest rate attached to the instruments. Tax
planning is one of the most important aspects of financial planning. Before
making any investment decision you should know final outcome post tax. Investors
in 20% and 30% tax slab should always stay away from taxable avenues like fixed
deposits and postal schemes.
The following are the
good options available in mutual fund which can not only give higher return
compared to fixed deposits but are also tax efficient. The returns in the schemes
are market linked and hence not guaranteed. This single point keeps lakhs of
investors away from good investment options which I would like to highlight.
1)
Arbitrage Funds:
The arbitrage
means buying in cash market and selling the same quantity in future and option
market. So if any fund or scheme does arbitrage means there is no equity risk
as the equity position is hedged in f & o segment. This arbitrage fund can give
you debt kind of return depending on the premium available on the stock. You
can expect around 6% return from this option. The scheme is good option for
higher tax slab investors because they are classified as the equity scheme for
income tax purpose. So, the fund will be treated as long term after a
period of one year and entire proceeds from arbitrage fund is considered as tax
free after 1 year. In case invested for less than one year then investors will
be liable to pay tax at 15% on gains which is lesser compare to 30% tax in fixed
deposits.
2) Accrual
Funds:
The funds mostly invest in corporate and government bonds with average
maturity of around 3-4 years. The fund holds the paper till end so there is no
major risk of interest rate movement. The fund can give 7-8% return at present
which you can identify from the yield to maturity. You have to deduct fund
management charges to arrive at final return. This is ideal if your investment horizon
is 3 years plus so that investor also gets the indexation benefit. Indexation
benefit will lower your net income tax liability and thus give you higher
return compared to traditional platforms. Only thing to check is the quality of
the papers hold by the scheme. Invest only in funds which hold AA+ and above
papers so that risk is lower. In the recent past we have seen that to generate
1% extra fund managers have compromised on the quality of papers and invested
in papers of AA- and also below that.
3) Fixed
Maturity Plans:
This are debt oriented closed ended funds available for 3 years plus
time horizon. In simple word you can say that these FMPs are like fixed deposits
for fixed tenure offered by mutual fund houses and automatically mature after
the period is over. These also work similar to accrual funds and invest in
corporate bonds and commercial papers. The yield is also same which largely
depend on quality of papers selected for investment. The only difference is
accrual funds are open ended funds in which you can increase the investment in
between and also redeem but this facility is not available in FMPs.
4) MIP funds:
These monthly income plans are riskier than above three categories as
these funds invests 15-20% in equity and balance 80-85% in corporate and
government bonds. This fund is suitable for time horizon of 3 years plus and
those who understands the risk of equity. Again indexation benefit is available
after holding the fund for 3 years as these funds come under debt category. I
always advise my clients to go for MIP funds when time horizon is 3 years plus.
At present 3 year return on these funds is in double digit but surely with some
extra risk.
This article first appeared at indianotes.com
http://www.indianotes.com/Finance-How-to/Where-to-invest-in-falling-rate-scenario/207923/2/T
