![]() Debt means ‘No risk’ & ‘Low return’? Wrong on both counts!Published on Mon, Dec 17, 2007 at 11:38 | Source : Moneycontrol.com Updated at Mon, Jan 28, 2008 at 12:31
NRIs have had the FCNR deposit, which is the foreign currency equivalent of the FD. They were popular in the past due to high interest rates offered (compared to what was available abroad), their full repatriation benefit, and the Rupee falling continuously against other currencies. However, interest rates on FCNR deposits today are very low (not over 5%), and the recent appreciation of the Rupee against major currencies has meant that real returns on FCNR deposits have been zero or even negative.
In the last few years, asset management companies have launched products called fixed maturity plans (FMPs) and interval plans. These offer the better part of both worlds - they only have a lock-in of one or two years (depending on the plan opted for) and offer returns largely in line with FDs. But since they are taxed at only 10% if held for greater than a year, they become superior to FDs in almost all cases. Of course, you may not hear of them in the market too often, since the margin for distributors on these products is low. But this is precisely the reason the product is good for you as a customer! Application forms for these are available with any certified mutual fund distributor; or can be obtained from the asset management company directly. Mutual Fund Debt Schemes Typically, a debt mutual fund would perform well in a falling interest rate environment. For instance, during the Feb 2001 to August 2003 period, interest rates were on a decline. Debt funds returned as high as 20% per year, as compared to the Sensex that returned -8.4% in the same period! In contrast, in the last year and a half, equity markets have returned in excess of 30%, while debt has returned hardly 5%, since the interest rates have been rising. Mutual fund debt schemes are of various types - such as short / long duration, gilt / corporate debt, etc., but we will not go into details of these in this article. Suffice it to say that mutual fund debt schemes are good for investors with low to intermediate risk appetite. They are ideal for investors who desire somewhat higher returns than an FD, but are unwilling to put money in equities. For, unlike equity, a debt fund is unlikely to ever lose principal, even if the returns themselves are low.
Arbitrage funds have one other very significant benefit - from the tax perspective. There is beneficial treatment to equity investments from a tax perspective, compared to debt. Arbitrage funds are considered as equity funds for the purpose of taxation, though their returns and risk more closely resemble a debt fund. Investors can therefore avail of this benefit, paying no capital gains tax on investments held in arbitrage funds for a period greater than one year. Investments for NRIs Summary The author works with PARK Financial Advisors Pvt. Ltd., Mumbai. He may be contacted at info@parkfa.com. For more Views by Experts click here
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