With FDs still being one of the most preferred ways to invest money, a decline in rates, calls for changing the game plan towards achieving financial freedom and accumulate wealth.
Sixty-year-old Satish was all set to park a chunk of his retirement benefits into fixed deposits (FD) with the bank he was holding an account for over three decades.
It was just then that he received a news alert on his phone, which on reading dampened his mood. The news was about the FD rate cuts by his preferred bank.
While the latest cut in the repo rate by the Reserve Bank of India (RBI), the fifth successive cut this year, has cheered borrowers, retirees like Satish who depend on the interest income from FDs for managing their monthly household expenses, have no reason to cheer.
With FDs still being one of the most preferred ways to invest, a decline in rates calls for changing the game plan towards achieving financial freedom and accumulating wealth.Here are three key strategies that you can adopt to nullify its effects
1. Exposure to equities
It is a well-known fact that among all asset classes, equities have the potential to deliver inflation-beating returns in the long run. Despite this, investors tend to give equities a miss because of volatility and non-guaranteed returns.
While these two factors make equities a risky asset class, to win the battle against the relentless march of inflation and compound wealth in the long-term, equities can be an ideal choice.
Sensex CAGR of around 13 percent over a 10-year time horizon shows that equities, among other asset classes, have the potential to deliver significantly high returns over the long-term.2. Adopt the SIP route
If you are a retail investor, investing in equities directly through stocks can be a challenging proposition. Also, financial prudence calls for testing waters before investing. Hence, to get started in equities, you can opt for systematic investment plans (SIPs) in equity mutual funds.
SIPs allow you to invest a pre-defined amount at regular intervals in your chosen fund. Even a modest SIP of Rs. 10,000 in an equity fund offering an annualised return of 12 percent in 10 years can help you amass a corpus of Rs 23 lakh.
While bringing discipline in the investment process, SIPs negate market volatility to a large extent and one also gains from the power of compounding.
When the markets are down, SIPs help you to buy more units at a lesser price. SIPs also offer you the flexibility to top-up the amount with an increase in income. Doing so can help you garner an even bigger corpus.3. Opt for debt funds
In case you are entirely averse to equities, debt funds can be an ideal bet. Post the categorization of mutual fund schemes by market regulator SEBI, there are 16 categories of debt funds to choose from.
Financial investment in debt funds serves twin benefits – it offers higher returns than FDs and non-convertible debentures (NCDs) along with better tax treatment.
The one-year average return on liquid funds, on one of the lowest-risk categories of debt funds, is 6.99 percent, but higher than FDs, which is a little above six percent.
Though NCDs can offer higher returns, up to nine percent or more, interest from FDs and NCDs are added to your income and taxed as per the existing tax rates. On the other hand, debt funds enjoy efficient tax treatment and indexation benefits. Indexation considers inflation during the holding period and raises the acquisition price accordingly.To sum up
Given the current market scenario, it will not be surprising to see FD rates plummet further. Hence, it’s crucial to look beyond FDs and identify high-yield investment avenues.
Also, it is important to consider a long-term approach to benefit from the inflation-trouncing returns of equities.
The author is Head, Personal Wealth Advisory, EdelweissDisclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.