At the time of increasing volatility in equity markets, Indian investors have started looking at other safer investment options. They feel that capital preservation is the first objective when it comes to managing their hard earned money, though they are ready to watch their money growing at a slower pace vis-a-vis Equities. Mr. Pinal Shah of Delhi, an IT professional did a similar thing after burning his fingers in equities during 2008 meltdown and 2011 stock market correction. And the only thing which comes to Pinal’s mind is a bank fixed deposit. He can’t afford to avail financial planning services as he has only Rs 50000 to invest which he got as an annual bonus from his company. He is certainly looking for better returns than FD. Let’s help Pinal and readers by discussing various options to be considered while making a choice between fixed deposit instruments or debt instruments
Tax Free Bonds – NHAI/PFC Bonds
At the time, when everyone is struggling to get enough ideas on how to save tax and pay minimum tax out of their salary along with investing their salary/earnings in one of the safer instruments, NHAI tax free bonds and other Section 54EC bonds issued by PFC, Power Finance Corporation of India play an important role. Tax free bonds issued by NHAI, PFC and REC offer a coupon interest rate of 8.2% for a 10 year maturity bond and 8.3% for 15 year maturity tax free bond. NHAI tax free bonds have been rated AAA by CRISIL, CARE which are the top Credit Rating Agencies of India and the outlook assigned by CRISIL is also stable. More important to mention over here is that the interest income earned from tax free bonds is fully exempt from Income tax (won’t be added to the total income while calculating income tax). NHAI tax free bonds are highly advisable to investors who come under 20% and 30% tax bracket. If we compare NHAI tax free bonds with tax free bonds, you will find a difference of around 1.5% per annum for individuals who fall under highest tax bracket and around 0.8% for individuals who fall under 20% tax bracket (considering fixed deposit interest rate being 9.5%)
Debt funds are an another good option when an investor is looking to invest in fixed income instruments. Fund managers of Debt funds invest money in long term and short term bonds of companies. Some of debt funds invest in government securities, called gilt funds. The return on debt funds depend upon the interest rate cycle in the economy. If the interest rates in the economy have peaked out or close to peaking out, you may get better returns as compared to fixed deposits because when interest rates falls, bond prices increases, thus NAV of debt funds increases.
Fixed Maturity Plans (FMP)
The only advantage of investing in FMPs vis-a-vis fixed deposits is that FMPs offer better post tax returns but mind you, the returns offered by FMPs are not guaranteed. The returns earned by a fixed deposit investor is added to his total income and taxed as per income tax slabs. But returns under FMPs which are held for a period of more than one year are taxed at the rate of 10% without indexation and 20% with indexation.
Public Provident Fund (PPF)
Another option where conservative investors can look to invest is PPF where the interest rate offered these days is 8.8% and you can invest any amount from Rs 500 to Rs 1,00,000. The tenure of PPF deposit is 15 years and an investor can extend it for a block of 5 years. You can open PPF account at SBI or post office or any other nationalised bank. The returns from PPF are exempted from tax. Investment in PPF can also be used as a tool for Section 80C deductions.
Looking at the various options for conservative investors who don’t want to risk their hard earned money by investing in direct stocks, Nine Million Dollars feel that PPF and tax free bonds and FMPs to a certain extent can be a good option where you can expect better post tax returns as compared to fixed deposits esp. If fall under 20% or 30% tax bracket. Otherwise, you may look to stick to fixed deposit option only where returns are not volatile and safe. Adding to it, the returns from debt funds and FMPs are not fixed unlike PPF, NHAI bonds and fixed deposits. They can deliver more or less returns than your bank fixed deposits