Here’s a headstart on safe investments, making sure you have explored all the choices that you have.
We have often spoken about asset allocation and the split between equity and safe debt. But what should you put into that risk-free debt bucket? That's what well tackle today.
We're so besotted with equity markets and its ups and downs; we almost tend to forget there's a whole universe of investments out there which is steadily building wealth for you. These are the investments in your debt bucket- hugely safer investment options than equity.
Some you definitely are invested in and perhaps don’t even count when you tally up your savings like provident fund. Then there are a few you may have missed out on not having enough information about them. So we decided to do a checklist of whether you've explored all your really safe debt investment options and making the best of them.
Safe is music to the ears right now, isn’t it?
Markets are irrelevant; these are products are those that you will use in any kind of market. We're looking at safe fixed return products that you will use for the debt part of your asset allocation.
Beginning with a checklist; what are debt investments?
What is a debt instrument?
# Gives fixed return
# At a fixed time
# Usually guaranteed
Role of a debt product?
# Provide safety of money
# Target an assured sum
# Give regular income
# Give stability to portfolio
Bank FDs, post office deposits, PPF and now bonds. It is always difficult to choose. The best way to choose is to look at utility:
# Products that allow us to build a corpus
# Products that give off a regular income.
We first talk of products that allow us to build a corpus. It can be done in two ways:
# Lump sum investing
# Regular investment
So let me take you through safe investment options of lumpsum investing; right now we feel the best in the market is a Bank FD. The rates are phenomenal and all of you should be booking some FDs in your portfolio; also we believe the rates could come down, so this window of high FD rates is not a big one. Here's a list of best Bank FDs going round bank town:
# DBS Bank- 1 year-2 years: 11.25 per cent
# Axis Bank- 500 days: 11 per cent
# ING Vysya Bank-1 year: 11 per cent
# IndusInd Bank- 400 days: 11 per cent
In case you need to block in for 5 years, a bank FD is paying about 10.75 per cent, that's the best return.
This is seriously good, risk free returns; aren't they?
Post office savings and the KVP as the other two options for lump sum savings:
Bank FDs today work the best when you compare them to other products in the same space - like the post office deposits and the KVP.
# Post office deposits are returning at most 7.5 per cent on a 5 year deposit
# KVP gives 8.4 per cent over 8.7 years
So this is what you will end up earning if you put away some money in Post Office savings- a lakh will fetch you1 lakh 6000 rupees and a little more in one year. The interest is compounded quarterly and if you can keep it for longer than 3 years you can get 7.25 per cent safe returns.
In 3 years, you will get (Int. 7.25 per cent) Rs 1,24,055, and in 5 years- just 5 rupees short of a lakh and a half.
Then there's one other long term option of lumpsum investment- Kisan Vikas Patra- your money is blocked for 8 years and 7 months and doubles in this period ( 2 lakhs).
There's one more product right now being advertised heavily - a bond from Nabard offering over 12 per cent returns. That's mouthwatering risk free returns, aren't they?
NABARD Bonds
# NABARD Bhavishya Nirman Bonds: Rs 1 lakh will become Rs 2.35 lakh in 10 years (rate of interest is 8.93 per cent)
NABARD is advertising 12.18 per cent but that is simple interest. There has been some argument with the CBDT on the taxation of the return - whether it is interest or capital gain. According to the Nabard Offer document this is capital gains and that works better for us than an income tax.
We are talking about how to choose debt products to fill our debt bucket. We saw that bank FDs are the best option today to target a corpus if we have a lump sum today. But what if we want to use a safe product to use regular savings to target a future goal? There are two products here and we all know about them, don't we?
Here's a quick look at your regular investment options to build a long term corpus:
# Bank recurring deposit: You get Rs 3.6 lakh if you invest Rs 5,000 a month for 5 years; that’s at 7.5 per cent interest per annum.
# Much better option of course is PPF; 70,000 is the limit, which you and your spouse should definitely be maximising every year.
In PPF you get Rs 19 lakh in 15 years at Rs 70,000 saved a year.
# And there's EPF; you get Rs 1.5 crore in 30 years if your present basic salary is Rs 15,000 and growing at 10 per cent per annum- 8.5 per cent per annum. That's a lot of safe money in every employed person's kitty.
1.5 crore- now that's a nice whole number. This number is on the assumption of a starting salary of Rs 15,000 a month that grows at 10 per cent per year and this person works for 30 years without withdrawing from the EPF account. EPF is one of the best ways to target our retirement since the money is deducted before the salary comes into our hands. A little known fact is that if you maintain a EPF account for more than 10 years you become eligible for pension. A checklist to get the best out of your EPF:
# Max your contribution to 12 per cent of your basic salary plus dearness allowance.
# Don't encash your EPF account when you move jobs. Get a transfer.
# If you stay in the EPF for at least 10 years, you can get pension when you turn 58.
# Don't withdraw your pension scheme money even if you encash your EPF.
# Instead, get a scheme certificate, which you can give to your new employer and carry forward your pension account.
What if you've already build a substantial kitty of savings and are looking safe regular investments- these are the options you could look for regular investments:
# Post Office Monthly Income Scheme (MIS): Here each individual can invest upto 3 lakh rupees, not more and you are allowed a joint account with spouse that can take this upto 6 lakhs per annum and this 6 lakh invested gives back Rs 48,000 a year. That's 8 per cent per annum, interest payable monthly.
# For senior citizens there also Senior Citizen Bonds: Rs 15 lakh invested gives back Rs 1,35,000 a year. 9 per cent per annum is your returns and you get money back quarterly.
In ranking these investments, you will have to mix and match here. If you need regular money right away- you should look at the Senior Citizen Bond. If you have more than Rs 15 lakh, you can use the post office MIS.
But if you are able to defer this income need by 1 or 2 years, I would use the bank FD to get that over 11 per cent rate of interest and then use MIS and Senior citizen bonds to give me a regular return.
A checklist for you:
# Have you and your spouse maximised investment of 70,000 rupees each year in public Provident Fund ?
# We also recommended you should be Maxing your EPF or employee provident fund contribution to 12 per cent of your basic salary plus dearness allowance. Must talk to your company today and tell them to do that.
# Then we recommended that for 1 to 5 years lumpsum investments- with rates likely to come down we would recommend that you do put some of your surplus investments in those.
# There are also government backed investments like Post Office deposits and Kisan Vikas Patras which most of us tend to ignore simply because they are not available easily; only a select list of agents sell these products.