Today the interest rates on bank fixed deposits are at multi-year lows.
For example, State Bank of India is offering interest rate between 5.50
per cent and 6.90 per cent across different maturities on retail
deposits (below Rs. 1 crore), according to its website.
Though the Reserve Bank of India has held its repo rate steady for some
time, the 175-basis-point cut in its key lending rate since January 2015
has led to a broad decline in overall interest rate in the financial
system. And the surge in deposits after demonetisation has forced banks
to bring down interest rates on fixed deposits.
“With bank fixed deposits at around 7 per cent and offering a post-tax
return of 5-7 per cent depending on one’s tax slab, clearly for people
in higher tax slab this will only help them match inflation and be at
best a value protector,” says Manoj Nagpal, CEO, Outlook Asia Capital.
But conservative investors should maintain their asset allocation based
on their risk profile, he said.
Some newer private banks offer higher rates, Mr Nagpal added.
“Given that most asset classes that replace debt like gold, real estate
etc have also not been giving returns in the short term, equity seems to
be emerging as the only alternative. However investors should not
over-allocate to equities just in the chase of higher returns. If being
safe is the objective, then one should surely remember that equities are
volatile by nature,” he said.
He says small savings schemes like 5-year NSC (National Savings
Certificates) offer a superior alternative for investors though with a
slightly longer lock-in and could also be considered.
For senior citizens, Mr Nagpal recommends the Senior Citizen Savings
Scheme and the to-be-launched Varishtha Pension Bima Yojana from LIC.
The Varishtha Pension Bima Yojana 2017 is a pension scheme for senior
citizens, which was earlier approved by the Union Cabinet. The Varishtha
Pension Bima scheme 2017, which will be implemented through Life
Insurance Corporation of India (LIC), assures pension based on a
guaranteed rate of return of 8 per cent for 10 years.
Among debt mutual funds, Mr Nagpal suggests accrual funds with a high
quality of underlying portfolio for conservative investors. Given that
the Reserve Bank of India has once again cautioned on the higher risks
to inflation, conservative investors should reduce allocation to long
duration debt funds, he added. Accrual funds mainly focus on earning
interest income from the coupon offered by underlying bonds while debt
funds based on duration try to gain from the upward or downward movement
of interest rate in the economy.
Vidya Bala, head of mutual fund research at Fundsindia.com, also says
conservative investors should “actively considerer income accrual funds
in mutual funds.”
If investors have a shorter time frame, Ms Bala suggests short-term and
ultra short-term debt funds. “If they need regular income, they can use
systematic withdrawal from short-term debt funds,” she adds.
Source: Profit NDTV
