The popular 7.75 % savings bonds, which were also known as GOI bonds or RBI bonds were withdrawn for subscription last month w.e.f 29 May 2020.
Come 1st July, the bonds are being re introduced in an entirely new avatar and will be called Floating Rate Savings Bonds 2020 (taxable).
Here are some of its main features –
- Any Indian resident can invest as an individual or as joint/either or survivor /minor with guardian. HUFs can invest too.
- These bonds will be issued only in electronic form and held in an account called the bond ledger account ( BLA) for the investor.
- These bonds are not transferable, except transfer to nominee or legal heir in the event of death of the investor.
- The coupon rate will be floating and pegged at the National Savings Certificate (NSC) rate + 0.35 %. It will be revised every 6 months on Jan 1 and July 1
- Coupon rate for the first subscription opening on July 1 2020 will be 7.15 % ( 6.80% + 0.35%)
- One can subscribe to these bonds through cheques/drafts/electronic mode and cash (only upto Rs 20,000)
The ongoing issue of sovereign gold bonds open from 8 June 2020 to 12 June 2020 has brokers and agents outdoing each other by glorifying its benefits to the potential investors. Since there is enough and more being written how it is a not-to-be missed investment opportunity, this post is not about the “pros” of the issue but about the “cons” which no one seems to be discussing.
- The interest of 2.5% per annum is fully taxable.
- This is a simple rate of interest, does not compound.
- In case someone redeems this before maturity, it attracts capital gains tax.
- Though the bonds are tradable on NSE and BSE, the liquidity and pricing depends solely on the demand at that time.
- The actual gain depends on where the price of gold is at the time of maturity of the issue.
The objective of this post is just to highlight the few drawbacks of this scheme which one should be aware of along with the unique benefits it offers which make it a good investment option. Please consult your financial planner/advisor to understand its suitability and the ideal allocation in line with your financial goals.
Disclaimer: The views and opinions expressed here are solely those of the writer and do not constitute any financial advice in any way nor suggest or promote investments in any products.
The global pandemic has resulted in a secular stock market downturn since February. In just over a month starting from the 3rd week of February, the Nifty corrected by over 35 %. Though it has recovered slightly from that low, it is at a 25 % discount to its price before the start of this meltdown.
As a result we have been getting many inquiries from clients, investors, friends, acquaintances wanting to take advantage of this. The most common queries being asked are:
- I want to invest in quality stocks now at these cheaper valuations. How do I ensure that I invest in companies with strong fundamentals and good credentials, which are likely to bounce back once we tide over this covid crisis?
- I am stuck with an existing portfolio of shares/equity funds which are at a significant loss now, and I do not have any spare funds to invest. Should I book at loss to prevent any further damage, or wait patiently for things to get back to normal?
- I have never invested in equity earlier. But from all the news reports and advice from my experienced friends, I feel it is the right time to start. What is the best way to go about it?
We are financial planners, and our main objective is to protect investor wealth over the long term and ensure that it generates superior risk adjusted returns so as to meet all the financial goals. We are neither fund managers, nor equity analysts or stock market experts.
However, equity investments form an integral part of our recommendations and we have listed below what services we offer in this space.
- For those investors wanting to get into direct equity, we have researched, identified and shortlisted a couple of equity advisory companies which have a good track record and have been consistently beating the benchmark indices. Most of these start with an initial investment of 5-10 lakhs. These advisory outfits have portfolios with specific themes which the investor can take exposure to depending on their preference. They are given a login access to the equity portfolio which they can check anytime to see where the fund manager is investing or what is being bought and sold.
- For the DIY investors who are savvy and have been managing their own share portfolios for a long time, and only want recommendations or names of select stocks to invest in with the rationale and reasoning behind it, there are organizations which we can suggest which do this for a fee.
- For those who have an existing portfolio of shares which they haven’t been able to track properly or do not know what to do next, please send it to us, we can analyse those based on certain standard basic parameters which lie within our purview and area of knowledge and expertise, and give you our feedback.
- For the new entrants, we suggest that they avoid getting into direct equities right away; and start with investing small amounts regularly into diversified equity funds with a proven track record of consistency in returns. We can help you construct a customized portfolio of equity funds, which we will help you invest, and manage and track it too.
Gold has always been perceived as a safe haven to invest in during times of global crisis. So it is not surprising that in the current times of the covid pandemic and fears of a long drawn global recession gold prices have been on an uptrend and in spite of gold currently being at an all time high of around 4600 per gram, the demand has still not reduced. Those who have already invested in gold may exit other asset classes like equity, debt etc, but most of them hold on to their gold assets, as they are considered to be always a “valuable” investment for the long term.
What are the various ways in which you can invest in gold?
- Physical Gold – bars, coins, Gold investment schemes run by jewelry shops etc
- Gold Exchange traded funds
- Gold funds by Mutual fund companies
- Funds which invest in Gold mining companies – These assumes higher risk, and is a slightly indirect way of taking exposure to gold, but has potential to generate high returns.
- Sovereign gold Bonds – These open for a short window regularly from time to time.
While most of them track the price of gold, it is imperative to understand how they work – how to invest, what is the minimum amount required for investing, the ideal time horizon, the exit and withdrawal rules, charges and the applicable taxes. While all this information can be obtained from the internet through some research, what is the most important is to understand which of these is the most suitable for you.
We financial planners sit with our investors and clients, and apart from giving them in depth details of each of the above investment options, we also arrive at which one is the best suited for their personal profile, what should be the percentage to be allocated, depending on how much exposure they already have to this asset class, and aligning this investment to their financial goals.
This is something which one cannot find on google or you tube!
Irrespective of how the economy is doing or where the prices of gold currently are, we have always advised that gold should always be part of any investment portfolio because it a unique asset class which is uncorrelated / negatively correlated to other common ones like equity and debt.
Interest rates in India were on a steady decline for the last few years and the demonetization of 500 and 1000 rupee notes has just accelerated the process. Many banks like ICICI Bank, HDFC Bank, Canara bank have announced a rate cut (ranging from 10 bps -0.10 % to 50 bps -0.50 % depending upon the tenure of the fixed deposit) with immediate effect, all other banks too will follow suit soon. Even AA+ rated companies like Mahindra and Mahindra Finance, Dewan Housing Finance, Shriram Transport Finance have cut their deposit rates.
This was long overdue; as India is one of the very few developing economies with such high interest rates and sooner or later they would have had to align with the global rates and lower interest rates will also stimulate economic growth. While all this is theoretically logical, fixed income investors especially retirees who are dependent on the interest for their regular expenses now face a practical problem – where to invest so as to get a reasonable amount of fixed income assuming low risk on principal? India does not have a social security system like the developed countries do which makes it all the more important to explore alternate low risk investment options .
- Company fixed deposits – Though they have higher interest rates varying from 50 bps to 200/300 bps higher than standard bank deposits, people are not comfortable putting in their money as the general perception is that it is risky as they are unsecured. True, they are riskier than bank fixed deposits, but AA+ rated plus deposits rate high on safety and can be considered. Moreover, there is no guarantee than banks cannot go bust. And DICGC – The deposit Insurance and credit guarantee corporation guarantees only up to 1 lakh bank deposit per client, so anything above that is unsecured.
- Senior Citizen’s Savings Scheme (SCSS) is one of the most attractive options for the retired. Up to 15 Lakhs per account above age 60, and the current interest rate is 8.6 % pa fully taxable for the financial year 2016-2017. The tenure is 5 years and the scheme carries the highest safety.
- Tax free Bonds – These too carry sovereign risk- highest safety. The coupon rate is usually lower than that of fixed deposits, but for those in the highest tax bracket, the effective returns is higher than the post -tax returns of the taxable fixed deposits. The main disadvantage is the high lock in period – 10/15/20 years. These bonds are trade able in the secondary market; but how soon it can be liquidated in case of emergency depends on the trading frequency and volume. Another disadvantage is that they offer only annual interest under the non -cumulative option hence may not suit those who are looking for regular income. There are very few new issues coming out in the market, but one can always buy the existing ones being traded at the ongoing bond prices.
- Debt schemes of mutual funds – These don’t guarantee a fixed return, but score over fixed deposits in terms of tax efficiency for those taxed at the highest slab. These are liquid, can be withdrawn anytime and have monthly, quarterly and half yearly dividend payout options too, but the amount of dividend paid is variable, not a regular fixed amount.
- Government of India 8 % taxable bonds – These bonds were not a favorite till recently, since long term fixed deposits paid more than this, and with the interest being taxable like FD interest, there was no clear advantage of investing in these. But now with the fixed deposit rates having reduced drastically, one could consider this. But only half yearly option is available in non-cumulative category which may not suit those wanting regular monthly income.
- Post office Monthly Income Option – This is an evergreen product suitable to senior citizens with low risk appetite. The interest is payable monthly and the current rate is 7.7 % pa , and one can invest up to 4.5 lakhs in single name and up to 9 lakhs jointly. The tenure is 6 years (premature withdrawal facility is available after one year with some deductions). This product has an attractive feature – a bonus of 5 % on the principal which is paid if the deposit is held till maturity, i.e 6 years. The disadvantage of this product is that it is fully taxable, making the returns almost comparable to fixed deposits, which is why it is the last one on the list.
The Indian stock markets are in a downtrend since November 8, with the BSE Sensex losing close to 1500 points since then. It is common knowledge that the key triggers causing this uncertainty and volatility are the Prime Minister’s demonetization announcement, followed by Trump’s victory in the U.S presidential elections. Though market pundits feel that this is just a short term trend and the initial reaction to the sudden news, it is hard to predict the market trend in the medium term.
So how does the common man/investor deal with the equity part of his investments in the current scenario?
- Direct Equity/ Investment in shares – If you have a well-diversified portfolio of stocks which has been picked based on sound fundamentals and professional guidance, relax! However tempting it may be to sell/book some profits when you see the prices fall a bit every day, do not panic. Stick to your long term strategy and the investment time frame. And for those who have a dormant portfolio equity portfolio invested long time back and not actively monitored, the earlier they sit up and take stock, the better. Irrespective of how the market is doing.
- Equity Mutual Funds – SIP investments work on the rupee cost averaging concept, so are not affected by market ups and downs .(see https://srirakshafp.com/2012/03/27/understanding-the-rupee-cost-averaging-concept/) . Lump sum equity investments should be given a time frame of at least 3 to 5 years to deliver the target returns. Those who have held on to their investments have benefited much more than those who have acted on impulse and tried to en cash their investments to salvage the remaining profits.
Here is how diversified equity funds have fared over the long term
|Category||3 years return (%) *||5 years return (%)*||10 years return (%)*|
|Pure Large Cap funds||19.84||15.95||10.92|
|Pure Mid cap Funds||35.9||23.58||16.02|
|Value Style Funds||27.78||20.31||15.32|
|Hybrid/Flex i cap funds||22.70||17.00||13.49|
*Average returns of the category per annum. Source – Bajaj Capital.com
This clearly shows that irrespective of the time of entry and the intermittent volatility those investors who have held on to their investments have never regretted.
- If you need cash or were planning to book profits – A falling market is surely not a good time to sell stocks especially to meet unanticipated expenses; which is why any competent financial planner or advisor will always advise his clients to have some cash in the portfolio for emergencies. And if you plan to redeem because the investment has generated the target return, do go ahead. Always stick to the investment strategy and financial goal.
- If you have cash to invest in equity – Thanks to the one week slide in the market, almost all the blue chip stocks are now available at a discount. Don’t miss this opportunity to buy fundamentally strong stocks at a bargain. A word of caution – do not get lured into investing in stocks which have corrected the most-that could also be because the business model isn’t strong enough or due to some adverse news or development in the company.
The National Pension Scheme or NPS which was launched on 1 May 2009 was a major move by the government to convert the pension system from a defined benefit scheme to a more flexible defined contribution scheme with a range of investment options for the investors. But even after more than five years since it started, despite the government’s backing and low charges, it is yet to take off as a popular tool to save for retirement. This could be attributed to firstly the difficulties faced in opening the account – in post offices and the specified banks, where many times the employees themselves are not aware of the product and secondly the product limitations.