If you have downgraded your risk-taking ability in the current situation or are already a risk-averse investor, what are the options available to you to start a fresh investment?
Will it be wrong to keep a conservative investment stance now amid the heightened risks due to the prevailing Covid-19 pandemic? Well, that depends on your current financial health and the returns and liquidity requirements of your financial goals. It’s crucial to strike a balance between risks and rewards when you invest towards achieving your financial goals, which, in times like these, may demand a few pragmatic readjustments. If you think you won’t be able to manage the investment risks or taking a chance at this time may hurt your goals, you may choose to become risk-averse until the situation gets back to normal.
So, if you have downgraded your risk-taking ability in the current situation or are already a risk-averse investor, what are the options available to you to start a fresh investment? I have a few suggestions which you might find helpful.
Implement FD laddering technique
Fixed deposits are one of the most popular investment products among risk-averse investors. However, currently, FDs of big banks are fetching only around 5-5.5% p.a. interest for tenures between 1 to 3 years following the RBI’s decision to cut the repo rate on multiple occasions in the recent past. Once inflation increases, the rates may start rising again. So, to maximise investment returns without taking undue risks, you may implement the FD laddering technique. For this, you can break your corpus into multiple FDs with different maturities and keep reinvesting your FDs if you don’t require the funds to create an investment loop. By doing so, you can benefit if higher rates are being offered in the future. In fact, laddering allows investors to average-out interest rate fluctuations in the long-term and ensures higher liquidity compared to being invested in a single big FD. You may distribute the FDs in different banks if they offer you better rates. However, consider limiting your deposits to Rs 5 lakh in banks offering high FD rates.
In a bid to spread out your FD investments, you can also choose a few banks that are offering interest rates as high as 8.5-9% p.a. even today. However, if you’re unsure about a particular bank’s financial health, especially if it is offering higher rates, you may want to limit your deposits with that bank to Rs 5 lakh as that much is insured by the DICGC, an RBI subsidiary, in case the bank fails. This way you can enjoy higher returns while effectively mitigating the associated investment risks.
SGBs are good options too
Gold is widely recognized as one of the best hedging tools against inflation. But the RBI-issued Sovereign Gold Bonds (SGB) offer greater investment benefits in comparison to physical gold or even gold ETFs. Firstly, because there is no capital gains tax on redeeming SGBs after the completion of tenure. Secondly, SGBs offer an interest of 2.5% p.a. in addition to the capital appreciation linked to gold prices. Lastly, SGBs are completely free of the purity and storage concerns of physical gold. A few central banks are boosting the printing of currencies in recent months – something that may result in higher inflation that might help in rising gold prices in the future. SGBs can be a very attractive investment option in such a scenario, but you’ll still be well-advised to limit your gold investments to 10% of your portfolio value.
In conclusion, ensure your critical financial commitments like rent, EMIs, utilities, and insurance premiums do not get impacted because of your new investments. Also, avoid borrowed funds to invest as that can lead you to a debt trap and cause severe financial distress. When in doubt, always consult a certified investment advisor.
(The writer is CEO, BankBazaar.com)