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.
A couple of days back, one of the leading financial newspapers had a detailed article on the captioned subject including the method to calculate your required retirement corpus. One of my very close friends did so and was shocked to find that for her the amount worked out to be close to Rs 6 crores; far more than what she had expected. With this revelation comes the next worry – of finding some way to save this amount.
Let us understand this in detail.
Mr. Rao recently invested Rs 2,00,000/- in the dividend option of a equity scheme of a leading mutual fund house on the suggestion of his financial advisor. Some days back, he got an sms from the mutual fund informing him that a 60% dividend had been declared on the mutual fund scheme and would be credited into his a/c in a few days. Mr. Rao was very happy to hear this and was glad to have made the right investment decision and receive a huge tax free dividend.
A few days later the dividend was credited to his a/c. He was shocked to see the amount. It was around Rs. 12,000/- which was hardly 6 % of his investment amount. He was unable to understand how a 60 % dividend declared could be such a small sum.