It's essential for every individual to save and invest to meet future financial requirements and for spending after retirement.
It’s essential for every individual to save and invest to meet future financial requirements and for spending after retirement. However, with a range of financial products available, the dilemma for investors is where to invest.
Here are some of the less volatile instruments, which the investors may consider for predictable returns.
Fixed Deposit (FD)
Offered by banks and Non-Banking Finance Companies (NBFCs), fixed deposits (FDs) are the most popular investment products in India that give you a fixed rate of interest for the predefined investment period.
“No matter how the economy performs, returns are assured, however the rates are comparatively lower to other instruments and tax is deductible on the same,” said S Ravi, former Chairman of Bombay Stock Exchange (BSE) and Founder and Managing Partner, Ravi Rajan & Co.
“FD is the most secure form of investment but is a low yielding where TDS is deducted by the bank over an interest income of Rs 5,000. The advantage of fixed deposit is that the investment can be planned based on the requirement of liquidity,” he added.
A part of mutual fund (MF) offerings, debt funds are relatively stable investments, high on liquidity and reasonable safety. Long-term investments (investment for over 3 years) in debt funds are also inflation efficient.
“Debt funds invest in fixed income securities issued by the government and companies. These fixed income securities include corporate bonds, government securities, treasury bills, money market instruments and other such debt securities. Debt funds are less risky compared to equity mutual funds and have the scope of delivering better returns as compared to traditional saving products,” said Ravi.
“Debt funds offer lower returns as compared to equity funds but higher than Fixed deposit & G-sec. However, the NAV of debt funds fluctuates with changes in the interest rate. If the interest rates rise, the NAV of a debt fund falls and vice-versa. Further, debt funds come with a credit risk,” he added.
“Investment in debt mutual funds are more tax efficient over a longer period of time as one can avail indexation benefits,” Ravi further said.
Issued either by the Central Government or a State Government, Government Securities or G-Secs are the safest debt instrument.
G-Secs may be broadly classified into four categories, namely Treasury Bills (T-bills), Cash Management Bills (CMBs), dated G-Secs, and State Development Loans (SDLs).
“G-sec is a safe instrument which gives a current rate of 6.13 per cent per annum. The maturity is dependent on the period of redemption and these can be traded in the secondary market. The yield is based on the time of investment /maturity of the particular instrument. Falling interest scenario is an important factor that to be taken into consideration by the investors before investing and exiting,” said Ravi.
“They are generally considered the safest form of investment because they are backed by the government thus, the risk of default is almost nil. The only risk being interest rate fluctuations. Small investors can invest indirectly in g-secs by buying mutual funds, but RBI has come out with initiatives from retail investors to directly open their gilt accounts with RBI and trade in government securities,” he added.
“The G sec instruments return varies based on the issuer, liquidity and the maturity period. Retail investors can buy bonds which have provided reasonable returns and are liquid. Like bank fixed deposits, g-secs are not tax-free,” Ravi further said.
Apart from the government, companies may also issue bonds to collect money directly from the investors. Such Corporate Bonds may offer higher interest than the G-Sec, but have higher default risks.
“Bonds especially Tier 2 Bonds are an issue after it was written down in case of Yes Bank and Lakshmi Vilas Bank (LVB), where retail investors made losses. Moreover the recent circular to value bonds as instruments over 100 years has implications,” said Ravi.
So, which instrument would be suitable for retail investors?
“The investment strategy would depend on the preferences of an investor, based on factors like their requirement of funds, cost of funds, risk-taking ability and tax structure,” said Ravi.