In an economy where consumer-level real inflation is growing by 7-8%, putting money in an investment avenue which earns less than that is actually a sub-optimal strategy. Since inflation eats away our returns, any investment return less than the price-rise means that there is no real rate of return. It is a waste. This is why it is very important to consider investment avenues which can provide more than 8% return. Here are some options that provide such returns:
1. Select bank deposits: Even though most bank fixed deposits (FDs) are paying 6-7% per annum, if you shop around you can find great deals in the FD space. Fixed deposits in banks are the gold standard of safety. Plus, the rate is guaranteed. Some banks are offering more than 8% interest in longer-term tenures. For instance, Deutsche Bank AG, India is offering 8.25% in tenure of 5 years. AU Small Finance Bank is paying 8% for 45 Months 1 Day to 60 Months tenure. Senior citizen rates are higher. For instance, Axis Bank pays 7.4% in 1 year 5 days < 1 year 11 days’ tenure, but senior citizens will get 8.05% for deposits below Rs 1 crore. Do remember that interest income from fixed deposits is fully taxable. It is added to your total income and taxed at slab rates applicable to your total income.
2. Company fixed deposits: Company FDs, similar to bank FDs in return profile, are for investors who can deposit money for a fixed period of time for a fixed rate of return. Typically, company FDs with more than 12-15 month tenure offer a higher return. For instance, Mahindra Finance’s Dhanvruddhi scheme offers 8% for 20 months, 8.5% for 27 months, and 8.75% for 33 months and above. Bajaj Finance fixed deposits provide a lucrative interest rate of 8.40%. PNB Housing Finance offers 8.1%-8.2% for tenure buckets between 48 and 59 months and 120 months for regular deposit up to Rs 5 crore. Do remember company deposits are basically unsecured. So, kindly check if they are secured. As a company deposit holder, you may not have any lien on any asset of the company if in case it goes into financial difficulties.
3. Non-convertible debentures: Investors with moderate or high risk appetite can consider non-convertible debentures or NCDs for their fixed-income portfolio. NCDs keep on coming to the market with 8-9.5% interest rates. In the last 5-6 months, there has been such supply of NCDs. However, the decision making should not be based on coupon rates only. Investors must also consider other major factors like credit rating of the issuer, liquidity, and tenure or residual maturity of the issue. Do note that generally speaking, issuers with lower credit ratings have a higher risk of default. So, they naturally pay higher coupon rates to compensate their investors for the higher risk. Although they are traded on stock exchanges, NCDs have very low liquidity. An unforeseen financial emergency may force you to sell your NCDs at a discount. So, do factor in your liquidity requirements before investing in an NCD issue. Invest in NCDs only if you can stay invested till its maturity ie full tenure.
4. Mutual funds: Most equity funds and aggressive hybrid funds (with high equity allocation) have demonstrated the ability to give more than 8% returns. However, these returns are not guaranteed due to market linked nature. Over the last decade, the annualized category returns of most equity MFs (except international funds and infrastructure thematic funds) are between 11-16% per year. Aggressive hybrid funds have delivered nearly 12% CAGR. Mutual funds treated as equity earlier did not have long-term capital gains tax, but now they do. Even after deducting 10% tax, returns should be far higher than the 8% threshold in most cases. Investors, however, must position themselves in dynamic asset allocations funds if they are new to MFs. Having a bias for large-cap equity funds is a good thing given the anticipated volatility over the next many months.
5. National Pension System or NPS: For those investors saving for retirement pension, NPS can deliver more than 8% return. Like mutual funds, the returns are not fixed. The funds contributed by the NPS subscribers are invested by the PFRDA-registered Pension Fund (PFs) as per the investment guidelines provided. The guidelines are framed in such a manner that there is minimal impact on the subscriber’s contributions even if there is a market downturn by a judicious mix of investment instruments like Government Securities, Corporate Bonds, and Equities. The equity plans of NPS have generated between 7.90% and 14.3% return in the last one year. In the five-year tenure, the equity plans have given between 12% and 15% returns. Under normal exit in NPS, the subscriber is required to annuitize at least 40% of the corpus for the purchase of an annuity for receiving the monthly pension and the remaining corpus (60%) can be withdrawn in lump-sum. In case the accumulated corpus at the time of exit is equal or less than Rs 2 lakh, the subscriber has the option to withdraw the entire corpus in a lump sum.
Clearly, there is a vast array of good investment options that are capable of delivering more than 8% return pre-tax basis. Investors, however, should pay a lot of attention to post-tax returns and see what they are getting in hand. A good mix of all sorts of investment products as per risk appetite should help them generate superior returns without exposing their money to unnecessary problems. If you are young, try to take higher risks. Do not limit your portfolio and investment gains by totally avoiding risk in favour of stability. Invest regularly and keep an eye out on any new opportunities coming your way to derive the maximum benefit.
(By Anil Rego, Founder and CEO, Right Horizons)