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Credit policy and fixed income investments

With the RBI slashing Repo rates, there is renewed expectation that people will loosen their purse strings and invest. Be it extension of tax free bond, attractive FDs or FMPs, each product manufacturer is putting its best efforts to lure investors. Here are a few options you should consider in mind while falling for such attractive options.

February 06, 2013 / 12:02 PM IST

With the Reserve Bank of India slashing Repo rates, there is renewed expectation that people will loosen their purse strings and invest. In such anticipation, be it extension of tax free bond issues of IRFC & HUDCO and attractive fixed deposits schemes or fixed maturity plans, each product manufacturer in the financial market, is putting its best foot forward to lure investors' money. This calls for a strong reason for tweaking your fixed income investments. Here are a few options you should consider in mind while falling for such attractive options:


Bank fixed deposits


If you are a bank fixed deposit investor, you have to lock in your bank fixed deposits for a long term. Typically, banks are offering higher interest rates for one year tenure. However, as the interest rates move down, you are exposed to reinvestment risk. You may have to deploy your proceeds of one year fixed deposit at a lower rate, next year. Hence it makes sense to go for three to five years fixed deposit if your cashflow needs permit. You can get interest rates in the range of 8.5% to 9% on bank fixed deposits. Interest on bank fixed deposits are added to individual's income and taxed at marginal rate of tax.


Check out BEST Fixed Deposit Rates offered by various Banks


Fixed maturity plans


For investors, in high-income slab, it is the time to invest in one, three and five years fixed maturity plans. Fixed maturity plans score poor on liquidity front, and hence it makes sense to invest in multiple schemes with varying tenures. Do not lock all your money in long term fixed maturity plans. These fixed maturity plans offer capital gains. These gains are taxed at lower of 20.6% with indexation or 10.3% without indexation. Yields on three years and five years AAA corporate bonds are quoting around 8.75% to 8.85%. So, a conservative estimate suggests that you can expect 8% returns from these FMPs. A point to note is these are not guaranteed payouts.


Tax free bonds


Ongoing tax-free bonds too can be considered to invest for a very long term period ranging from 10 to 15 years. These bonds are listed on BSE and NSE and are fairly liquid. Public offers of HUDCO and IRFC bonds are open and yields quote between 7.5% and 8%, depending upon the issuer and tenure. These are a very good investment option for individuals in the high income bracket. Either you can hold on to these bonds till maturity or you can sell it after 12 to 18 months to book capital appreciation as interest rates come down. These bonds are issued by various institutions backed by government, and hence carry very low credit risk.


Income funds and gilt funds


As interest rates go down, if you want to invest with a 12 to 18 months investment horizon and has got some risk taking ability, you can consider investing in long term gilt funds and income funds. Gilt funds, dedicated schemes investing in government securities ensure that you enjoy both coupon and capital appreciation without taking credit risk. If you have a bit more risk appetite you can also consider dynamic income funds.

Though each of these products has its own advantages, do not go with one single product. It is better to invest in a mix of these products of varying tenure and varying risk profile.

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