As far as fixed income investments are concerned, interest rate movement and taxation laws applicable to each of these investments play very important roles.
What are the best places to invest in fixed income for 2013? There is very little that has changed in 2012. The Indian economy continues to struggle with its lowest growth rate in a decade. India has continuously failed to control its twin deficits - fiscal deficit and current account deficit. Inflation has remained stubbornly above the RBI's comfort level of 5 to 6 per cent, due to which interest rates are still ruling higher.
Will the economy finally stabilize or will it continue to struggle for some more time? When will the inflation figure finally come down below the RBI’s comfort zone and thus, what will be the direction of interest rates going forward?
These are very difficult questions to answer with certainty. That is why every investment strategy needs to be dynamic. As far as fixed income investments are concerned, interest rate movement and taxation laws applicable to each of these investments play very important roles. Here is what I think the investors should do with their fixed income investments in 2013.
PPF - In my view, PPF is the best fixed income investment for the risk-averse investors. Investors are still getting 8.80% per annum tax-free returns out of their investment in PPF, which works out to 12.74% per annum effectively for the investors in the 30% tax bracket. Your investment up to Rs. 1,00,000 in PPF also qualifies for tax exemption under section 80C.
Investors should take full advantage of PPF’s high interest rate and tax exemption till March 2013 and check out its revised interest rate from April 1, 2013 onwards. If it continues to remain attractive, they should immediately top-up their investment with maximum possible contribution.
Gilt/Income Funds - This is one area which can do wonders to your fixed income portfolio in 2013, if inflation and RBI oblige. The investors have been praying since long for the inflation numbers to fall and the RBI to cut rates. Considering this, it was the biggest disappointment in 2012. If it materialises in 2013, the investors will definitely get double-digit returns from Gilt funds and income funds categories. Moreover, these funds are tax-efficient if held for more than one year and provide liquidity also whenever required.
Tax-Free Bonds - Last year there was a huge demand for tax-free bonds as they offered very attractive tax-free returns to its investors, especially Qualified Institutional Investors (QIBs), corporates and high net worth individuals (HNIs). Since then the yields on government securities (G-Secs) have fallen by approximately 30-60 basis points. Due to overall fall in interest rates, these bonds have appreciated in value and have given approximately 13-18% annualised returns since their allotment.
The interest rates on tax-free bonds issued this year have also fallen by approximately 40-50 basis points as compared to the interest rates offered last year. Tax-Free bonds have also become relatively unattractive this year due to their “Step Down” interest rate clause. Actually, retail investors get additional interest of 0.50% per annum as the original allottees. In the event the bonds held by the original allottees are sold/transferred, the coupon rate gets revised to the base coupon rate i.e. the new buyer is not entitled to the additional interest of 0.50% per annum.
Investors in the higher tax brackets of 30% or 20% can invest in tax-free bonds this year with a medium-term to long-term perspective and should not expect listing gains or quick gains out of it. Investors should have reasonable return expectations this year from tax-free bonds.
SCSS/NSC/POMIS - People who want safe investments can consider other post office schemes. Senior citizens, aged 60 and above, can earn 9.30% per annum in Senior Citizen’s Savings Scheme (SCSS). Other investors can invest in National Savings Certificate (NSC) to earn 8.60% per annum with its VIII issue (5 years) and 8.90% per annum with its IX issue (10 years). Both, SCSS and NSC, qualify for tax deduction also under section 80C.
Investors, who require monthly interest income, can invest in Post Office Monthly Income Scheme (POMIS) earning 8.50% per annum payable monthly. But, there is no tax exemption available with POMIS.
Corporate NCDs - Investors can consider buying listed non-convertible debentures (NCDs) of some good companies with healthy fundamentals and efficient managements. There are certain NCDs which are still yielding more than 12-13% per annum and are rated AA+. Investors should avoid the unrated or unsecured NCDs. Investors can consider investing in these NCDs over bank/company FDs because of higher interest rates and better taxation rules applicable.
Bank FDs - Due to lower offtake in corporate demand for loans, banks are not acting as deposit-hungry. They have consistently reduced interest rates on fixed deposits in 2012. The reduced interest rates coupled with adverse taxability leaves fixed deposits unattractive to me for 2013.
Corporate FDs - This is one area I would advise the investors to completely avoid in 2013. I have experienced many investors complaining about delay in interest payments or principal repayments with companies of poor managements. With a company getting bust, the investors may even lose their whole investment. It is better to explore other opportunities.
Now, please go ahead and start your investments for this New Year. I wish these investment options turn out to be fruitful for all of the investors! I would also like to wish a very Happy New Year to all of you! All of you have a prosperous new year ahead! Happy Investing!