Where to invest in an era of declining FD rates?

Riken Mehta
Friday, 27 October 2017

With interest rates unlikely to go up anytime soon, make the most of your idle cash and use it to create wealth by considering these options.

Indians have, since times immemorial, parked their surplus funds in the safest investment product available — fixed deposits (FD). Other lucrative asset classes that follow are gold and real estate. However, post the government’s move to demonetise Rs 500 and Rs 1,000 notes, banks were flooded with ample cash and leading banks reduced interest rates on FDs and savings accounts. Individuals in the highest tax bracket (30 per cent) would be the worst hit if they continued investing into FDs as post tax the promised 7.25 per cent interest falls significantly low to around five per cent. So the question is — where should one invest?

Liquid funds
Liquid funds are debt mutual funds that, as the name suggests, park money in short-term debt securities and can be liquidated (encashed) within minutes. Liquid funds do not guarantee fixed returns like savings bank accounts, but they have, over the years, given 6-8 per cent returns (vis-a-vis the former’s 3.5 per cent).

However, liquid funds are not advisable to taxpayers in the 30 per cent tax bracket as the interest earned will be taxed at the same 30 per cent, thereby making it less appealing for them. Individuals of lower tax bracket can consider moving money from savings account to liquid funds. On the liquidity front, market regulator SEBI allows for withdrawal of Rs 50,000 a day, or 90 per cent of your folio from liquid mutual funds, whichever is lower.

Corporate FDs, NCDs
When a person invests in corporate FDs or non-convertible debentures (NCDs), s/he is lending money to a company for its expansion plans. These instruments offer higher interest, in 8-10 per cent range, as compared to FD rates. The risk in this asset class, however, is that of losing your entire capital if the company defaults or declares bankruptcy. Hence, thorough research into the company is advised and it will augur well to stick to reputed companies.

Debt mutual funds
Debt mutual funds invest in debt securities and are classified based on tenor (short or long-term) and the issuer (government, corporate house, PSUs, and others). Typically, one should invest in debt mutual funds when interest rates are falling.

It is noteworthy that if one sells debt fund investments after 36 months, the returns, termed long-term capital gains, will be taxed at 20 per cent (vis-a-vis 30 per cent for individuals falling under the highest tax bracket) with the benefit of indexation — the provision that permits an investor to increase the purchase price of her debt fund adjusting for inflation in that period. This instrument will help save further tax and make it a more profitable investment option.

Tax-saving options
For investors and salaried women with long-term horizon and zero risk-taking ability (or those looking for a safe investment option), exhausting entire Public Provident Fund (PPF) limit of Rs 1.5 lakh is advised as it offers 7.8 per cent tax-free returns. Alternatively, salaried women can also increase their contribution to Employee Provident Fund which offers 8.65 per cent returns.

High risk, high return
Lastly, if one is willing to stomach some risk, then one can opt for equity mutual funds or invest directly into stocks. Stock investing in India is typically done based on rumours or tips since 90 per cent of people investing in the stock market are lured by hefty returns without understanding the risk involved.

It takes countless days of sheer hard work for a majority of us to earn our salaries, yet we are ready to invest a major chunk in stocks in just five minutes on hearsay and without actually doing any preliminary research. Ladies, spend at least 30 minutes, if not more, and do some basic groundwork of the company or equity mutual fund you are investing into. If you do not have time for research,  seek help of a financial adviser or pay professionally-managed portfolio management schemes for direct exposure in equities.

As interest rates are unlikely to go up anytime soon, make the most of your idle cash and use it to create wealth by considering any of the aforementioned investment options. Happy investing!

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