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Thursday, January 27, 2011

Tips to grow your money the safe way

Plain-vanilla fixed income assets can pump up the savings of not only the retired, but also those of young professionals.

You won’t catch them dead near the stock market. They are very happy putting away their hard-earned savings in fixed deposits, public provident funds, company deposits and so on. And not all of them are retired individuals who do not want the uncertainty of stocks ruining the fun of their sunset years.

There are many young executives, who don’t want to take the extra risk of investing in stocks. While a retired individual wants a monthly income to meet his day-to-day expenses, the working individual looks at building a fixed-income corpus to save for a rainy day or emergencies which may come his way. According to an India Wealth Report 2010 by Karvy Private Wealth, as much as 66% of Indian wealth, which is around Rs 48 lakh crore, is in fixed income assets.

Compared to this, global investors invested only 58% of their individual wealth in debt instruments during the same period.

Fixed income investors are generally risk-averse, want safety of principal and do not believe in churning their portfolios too much. They also want their investments to be as simple as possible.

There was a time when fixed-income investors earned as high as 12% by investing in bonds of reputed companies such as Tata Capital and Shriram Transport Finance or fixed deposits (FDs) of companies like Telco (now Tata Motors) and Mahindra Finance. However, that was during the global financial crisis in 2008-2009. With the crisis receding, earning double-digit interest on FDs is no longer possible.

No wonder, 2010 has been a tough year so far for fixed income investors. Inflation has sky-rocketed and remained in double digits for a major part of the year. The Reserve Bank of India raised rates five times during the year, in a bid to rein in rising inflation. However, banks were flush with liquidity and did not raise interest rates.

So, while inflation was close to 10%, interest rates were in the range of 6-7% per annum. As a result, investors got negative real returns from their fixed income investments. Simply put, when an investor gets 7% from his FD while the inflation rate is 10%, he actually earns negative returns.

Typically, fixed income investors have choices such as FDs (bank and company FDs), debt mutual funds (liquid funds, income funds, gilt funds, fixed maturity plans) and post office investments like National Savings Certificates and 8% Government of India (GoI) bonds. Fixed deposits account for 30% of the overall individual wealth in India, while small savings constitute around 7% of the estimated wealth in India. Here, we take a look at some solutions for retired and working individuals:

Retired Individuals: Typically, an individual, who has worked during his active years, receives a lump sum on his retirement. Safety of capital is of prime importance to him. His objective is to generate a monthly income out of this corpus to sustain his lifestyle, some lump sum money for his children’s wedding or education and some surplus money to take care of medical emergencies or to go for a dream vacation as the case may be.

Safety is one of the biggest priorities for retired individuals. The Senior Citizens Savings Scheme, which gives 9% per annum payable quarterly, meets this important need. Individuals, aged 60 and above, and retiring employees, aged 55 and above, can invest in the scheme. The scheme has a five-year tenure and can be extended further for a period of three years.

“This is the highest return that a retired individual can get with the highest degree of safety from the central government,” says Uttam Agarwal, executive vice-president, Bajaj Capital , who advises retired individuals to invest in this scheme. However, one must note that premature closure is possible only after one year, with a nominal penalty.

If individuals want a monthly income, they can opt for a post office monthly income scheme (MIS), which gives a return of 8% per annum. Here, the maximum limit is Rs 4.50 lakh in a single account and Rs 9 lakh in a joint account. Here, too, premature closure after one year attracts a penalty of 2% while closure after three years attracts a penalty of 1%.

Investors can also look at company FDs, where in some cases the returns can be as high as 9.5-11%, though they do carry a higher risk compared to government schemes. “We advise senior citizens to invest in companies with AA or AAA rating and spread their investments across a number of companies,” says Anup Bhaiya, managing director, Money Honey Financial Services.

Remember, don’t go by returns alone while zeroing on company FDs, as many retired people often fall victim to bogus companies offering high interest rates. However, when it comes to getting the capital back, they realise that the company has folded up.

When it comes to mutual funds for retired investors, fixed maturity plans (FMPs) and short-term income funds are considered the best bet.

“FMPs give you the benefit of indexation and returns could be in the range of 8-8.5% for a 1-3 year tenure,” says Ramanathan K, chief investment officer, ING Mutual Fund.

Working Individuals: We are assuming that you are averse to taking risks and, hence, do not want to invest any money in equity. Also, you may have some loans, like home and car loans, to repay. So, liquidity will be of prime importance to you, as the accumulated surplus money can be used in times of emergencies or fulfil short-term goals like a vacation. 

So, what kind of strategy should such young risk-averse people adopt in a rising-interest rate scenario? “He could invest some amount in a post-office MIP, and if he does not want the monthly income, he could further invest it in a post-office time deposit,” says Anup Bhaiya. In addition to this, he recommends company fixed deposits, as they give a slightly higher return than other products.

“He can invest in short-term income funds, as they offer ample liquidity, are tax-efficient and could give returns of around 7-7.5%,” adds Ramanathan K. “Such investors should invest in a combination of FMPs (fixed maturity plans) and short-term income funds. The duration risk in short-term income funds is low as they have a maturity of 1-2 years,” adds Pankaj Jain, fund manager, Taurus Mutual Fund .

However, experts believe that younger people should invest at least a small portion of their corpus in equities, as they can add sheen to their wealth. 

Short ‘N’ Sweet

Here are some ways to grow your money without investing in equities

If you have an investment horizon of 6-12 months, then you should opt for short-term income funds that give 6-7% returns

Go for fixed maturity plans (FMPs) of 370 days and reap the benefit of indexation for up to 8%

Invest a part of your money in company deposits for three years and earn returns as high as 10%. However, don’t get swayed by the promise of returns alone. Always stick to a company with an AAA or AA rating

You can switch from short-term income funds or liquid-plus funds to income or gilt funds, depending on the prevailing interest rates

Senior citizens can invest up to Rs 15 lakh in 9% Government Savings Scheme. They can also go for post office monthly income plans that give 8% returns per annum

Do not make the mistake of keeping too much cash in your savings account as that will earn the lowest interest. 

For greater liquidity, you could invest in Equities. (Share/ Funds)

Curtesy: ET
Note: To invest in Shares you need DMAT and Trading account.


How much tax do infra bonds really save?

The IDFC Infrastructure Bonds issue joins five other issues this financial year. A similar issue by Rural Electrification Corporation is already open. By investing in these products, taxpayers can claim a deduction of up to Rs 20,000 under Section 80CCF. This is above the Rs 1 lakh invested under Section 80C. While you save tax, your real returns may not be as high or precise as those being projected by some brokers. So before you rush to invest in the issue, here are a few points to ponder.

Good for saving tax:

IDFC bonds have a tenure of ten years and offer 8% interest on both the annual payout and cumulative options. The effective rate of return rises if you account for tax savings. The higher the tax bracket, the more the tax-saving potential. That means taxpayers in the 30% tax bracket will earn marginally higher returns than those falling in the 10% tax bracket.

If the company buys back the bonds after the lock-in of five years, the effective return would be 12.1%. This is higher than what most fixed income instruments will offer.

Don't believe in projections:

Your broker might try to lure you with calculations that show spectacular returns of up to 17-18% in case of a buyback of the bonds by the company after five years. Such a high rate looks probable only because there is a flaw in the assumptions. But the real rate of return is revealed when you crunch the numbers. First, to project high returns, it is taken for granted that the investor falls in the top tax bracket.

Now, considering tax savings of Rs 6,180 (30.9% of Rs 20,000), the actual investment drops to Rs 13,820 (Rs 20,000–Rs 6,180). The rate of return on this (using the concept of internal rate of return), considering the 8% earned every year for 5 years and the buyback at Rs 20,000, works out to about 18%. The problem with this figure, however, is that it assumes that the interest earned is tax-free, which is not the case. It also assumes that the interest earned every year is reinvested at 18% for the remaining tenure.

Also, the interest further earned on the reinvested amount is assumed to be tax-free, which again is incorrect. When accounted for all this, the effective return declines to about 12% —assuming that the interest is reinvested at 8% and the interest earned on the reinvested amount is taxed at 30.9%.

Remember buyback dates:

Both issues offer a buyback option to investors after the five-year lock in. It is best to exit at the first opportunity and reinvest the proceeds in other, more lucrative options. If you miss the window that opens for a specified period, the company may not buy your bonds. However, you can still sell them.


The bonds will be listed on major exchanges and you can sell them like any other security in the secondary debt market. Keep in mind that it is not easy for retail investors to find buyers in the secondary bond market.

The average transaction size is in crores of rupees. Imagine how much interest your Rs 20,000 bonds will earn. Add to that issues about capital gains that will crop up if you sell in the secondary market.

What is required:

A self-attested copy of the PAN card has to be enclosed with the application form. A demat account is not necessary because these bonds are in physical form as well. Of course, if you own a demat account, it is better to apply in the demat form. 
Curtesy: ET

Note: we provide DMAT and Trading account.

Holding mutual funds in a demat account

Investors can now hold their mutual fund units in dematerialised form. Investor who own a demat account can use it to hold mutual fund units. It is however not mandatory to convert units into demat form. Investors can also use the electronic platforms of stock exchanges to transact in their mutual fund units through the brokers of the stock exchange.

For this, investors have to use a standard form specified by the depository (CDSL or NSDL) called the conversion request form ( CRF )) or destatementisation request form (DRF). This form is available with the depository participant (DP). The completed form, along with the statement of account (SoA) which shows the unit holdings of the investor, has to be submitted to the DP. The DP will verify and forward it to the registrar and transfer agent, who in turn will confirm the details of units held in the SoA. Units will be credited to the demat account after this confirmation.

1. ISIN: Each mutual fund is assigned an ISIN ( International Security Identification Number )). It can be obtained from NSDL or CSDL and has to be included in the CRF/DRF.

2. Details: The details of each scheme with respect to scheme name, ISIN and number of units held should be correctly mentioned in the CRF/DRF and should tally with the SoA being attached.

3. Holding Pattern
The holding pattern of the mutual fund folios and that of the demat account should be the same, and in the same order.

4. Free & Lock-in Units
Mutual fund units such as those of tax-saving schemes may be subject to lock-in. Different forms have to be used for free and locked-in units of the same scheme even if held under the same folio.

Points to note
Signatures: The CRF/DRF has to be signed by all the unit holders of the folio, irrespective of the mode of operation of the folio.

Transacting with the mutual fund: Once units are dematerialised, investors cannot transact in them directly with the mutual fund or investor service centres. Transactions are routed through the stock exchange platform or through the DP.

Re-materialsation of units: Investors can also make an application for re-materialisation of the dematerialised units and only then transact with the mutual fund. 

Note: We provide DMAT and Trading account .
courtesy: ET

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