Review your fixed income portfolio post demonetization

Juzer GabajiwalaVentura SecuritiesPublic and private sector banks have started reducing their rates on fixed deposits due to the windfall inflows coming into the banking system since the currency demonetization was announced on Nov 08, 2016. Bank deposit rates for the top public and private sector banks, on an average, currently stands at 6.8% p.a. for three years and is expected to go down further. These rates are for deposits of up to Rs 1 crore and may differ for senior citizens. With lower interest rates, you need to answer the following questions before you invest your hard earned money:1.    Are your returns tax- efficient?2.    Have you factored in the impact of Inflation?3.    Have you looked at alternate fixed income products?    Below is a ready reckoner for individuals in different tax-brackets:For individuals in 30% tax brackets- Data as on Nov 30, 2016. Assumed inflation is 4.2%- CPI Inflation for Oct-2016.As seen from the above table, debt funds, both Duration and Accrual, have been able to generate better real return than traditional instruments like bank fixed deposits. Also, post-tax returns of liquid funds are higher than pre-tax returns from a saving bank. More specifically, liquid fund have given a real return of 0.6 to 0.7% as against savings accounts negative real return of -1.4%. For individuals in 20% tax brackets:Data as on Nov 30, 2016. Assumed inflation is 4.2%- CPI Inflation for Oct-2016.Debt funds, both Duration and Accrual, continue to generate better real returns than traditional instruments like Bank FDs. Their post-tax return continues to be the same, due to the long term indexation benefit for a holding period of 3 years.  Also, there is no change in the return on tax-free bonds.For individuals in the 10% tax bracket:Data as on Nov 30, 2016. Assumed inflation is 4.2%- CPI Inflation for Oct-2016.Debt funds continue to generate better real returns than traditional instruments like Bank FDs. Their post-tax return continues to be the same due to the long term indexation benefit for a holding period of 3 years.  Also, there is no change in the return on tax-free bonds.The below table summarizes the instruments one should look at after considering individual tax slab:Conclusion: Before investing in any fixed income products, it is imperative to undertake a proper analysis, specifically when the interest rates are headed downwards. One of the biggest benefits that debt mutual funds offer is capital appreciation when interest rates go down. We are currently in that zone and hence, this should be taken into consideration. Apart from the above, do also consider the following:1.    Need for regular income or cash flows. 2.    Liquidity or lock-in period before which investments cannot be withdrawn.3.    Credit rating of the bond/deposit before investing.It is your hard earned money, do not part with it without proper due diligence. Remember every penny saved is a penny earned.