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Jun 25, 2012, 11.27 AM IST
In the current uncertain financial condition, investors are often perplexed on investments which will earn them good returns. Financial advisor Jitendra Solanki lists out various avenues available today in the fixed income space will help investors to earn that extra return without impacting their financial objective.
You have received a bonus from your job which you want to earmark for house repair next year. With lot of uncertainty in the financial markets and fixed interest options phasing out, the question which arises to your mind is - Where can I get the best returns in this period?
Many investors' makes mistakes by investing short term surplus in high risk instruments to gain that extra return. However, if analyzed wisely, a high interest rate scenario can throw up opportunities to earn good returns on your short term investments without impacting your requirements.
Let's look at various avenues available today and how an investor can derives the benefit through them:
1. Savings Account: Undoubtedly, it's the first option which would come to most investors mind when liquidity is the prime concern. With interest rates deregulated now and interest income come up to Rs 10000 exempted from tax, keeping your funds in the savings account has become attractive. Also, banks have to calculate interest payment on funds lying in savings account on daily basis which is an advantage to investors. However, the high interest rate of 5-6% is offered by few banks and above a threshold limit. The rates on small amount of funds are still 3-4% which leaves enough room to rethink on the option.
2. Fixed Deposits- FDs by banks are considered to be safe and are highly liquid investments in comparison to other options. Today a 1-2 year FD fetches around 8-9% annual interest which is very lucrative for investors. However, taxation play a big role as interest is taxed by adding it to your income. For individuals falling in highest tax slab, an interest of 9% will earn 6-7% post tax which just equals inflation. But for investors in lower slabs, the returns are fairly attractive. The biggest factor which favors investing in the product today is that the money will get lock in at high rates even if the interest rates falls going forward.
3. Sweep facility from Banks- Banks have a sweep-in/sweep-out facility where funds lying in savings account above a threshold limit are invested in fixed deposits giving higher returns to investors. There is no effect on liquidity of savings account and one can withdraw funds at any time. Since the underline investment is Fixed Deposit, one has to look at taxability to judge the real benefit from the investment.
4. Ultra Short Term Debt Funds- These funds invest in securities with short term maturities and in last one year, they have been able to generate around 8.5-9.5% returns. The biggest attraction in Ultra Short term funds is the tax implication. They are subject to a Dividend Distribution tax of 12.5% for individual investors (effective rate 13.52%). The short-term capital gains tax (for growth units) is as per your income-tax bracket while the long-term capital gains tax is at 20% with indexation. A high interest rates scenario and efficient taxation makes it a good case for investment. However, one should not expect the same performance when interest rates falls and have a check on the credit quality of the portfolios before selecting a fund.
5. Fixed Maturity Plans (FMPs) - Fixed Maturity Plans are debt mutual funds schemes which gives nearly fixed returns to investors and do not get impacted by interest rate fluctuations. These are available with different maturities and scores on efficient taxation when compared to fixed deposits. However, unlike FDs, they do not carry high liquidity as the investment can be withdrawn only through stock exchange where trading of these instruments is not high. Hence, one should be very clear of the requirement while investing in this instrument. In current interest rate scenario these are offering high post tax yield to investors and like FDs, the investment gets lock-in at high yield for the period.
6. Short Term Debt Mutual Funds- These schemes invest in debt securities with maturity period of 1-2 year. Although, short term debt funds get impacted by change in interest rates, current scenario has made them very attractive as they have been able to deliver 8-9% returns to investors. Also, a lower dividend distribution tax (13.52%) and efficient long term capital gains taxation (20% with indexation) makes it a good option for investors with a higher risk appetite. There are categories of floating rate funds which can be opted by investors who do not wish to take risk of interest rate fluctuations.
The author is a Certified Financial Planner and Founder of JS Financial Advisors. You can reach him at email@example.com
Tags: Fixed Deposits, Savings Account, Sweep facility from Banks, Ultra Short Term Debt Funds, Fixed Maturity Plans , short term debt funds, Jitendra Solanki
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