Personal Finance: All About G-spots

PERSONAL FINANCE
All About G-spots

By Shilpa Nayak

Ok. We lied. This story isn't about elusive erogenous zones. But before you flip the page, tarry awhile. For, we do intend to discuss a sweet spot in the investment market you probably haven't bothered to explore: G-secs, or government securities, a.k.a. gilts. Think gilts aren't cool? Well, think again. Nobody-yeah, that's right, nobody-has ever lost money investing in gilts. And that's a Rs 3,70,000 crore annual market (2000-01) we are talking about here. So, just what are gilts, what makes them hot, and why should you be investing in them? Sit back, push up your bifocals, and read on.

SNIPPETS

Now, Insurance From OM Kotak

Close on the heels of Max New York Life, OM Kotak, the insurance arm of Kotak Mahindra finance, has announced the launch of three insurance schemes: endowment plan, money-back plan, and OM Insurance Bond. The endowment plan offers a basic assured sum at the death of the insured individual. The other benefits come in the form of term cover and accident benefits. If you buy a term cover, your nominee will get an extra amount on the actual cover. And if you buy an accident cover, then in case of an accidental death the nominee will receive accident benefits. OM Kotak's endowment plan also has a new feature-a personal accumulation account. This means, the premium money paid over the years, by the insured individual, will be deposited in his or her personal accumulation account. After deducting the expenses and risk cover charges, the balance money will be invested, as per the IRDA regulations. After three years, if you fail to pay the premium, money from your personal accumulation account will be used towards paying the premium, and your policy will not be cancelled.

Besides being a life insurance policy, the money-back plan also provides you with a guaranteed cash payment every five years, for interim expenses such as renovating house and foreign trips. As in the case of the endowment plan, the money-back plan too, has the benefit of a personal accumulation account. As its name suggests, the single premium bond entails payment of a single premium, and works like a long-term fixed deposit account that doubles on maturity. You can also borrow against this bond. And if the policy holder dies before the policy matures, the nominee gets a death benefit, 130 per cent of the premium for two years, and 200 per cent of the premium paid in the 10th year.

Older, Wiser, And a Trifle Richer Too

HDFC Bank has introduced a new interest slab for senior citizens. If you are 60 years of age or above, you can enjoy an interest hike of 0.25 per cent to 0.50 per cent on fixed deposits placed with the bank. A 29-day deposit below Rs 25 lakh, can now fetch a senior citizen 5.5 per cent interest rate, as against the previous 5 per cent. If the deposit moves up to Rs 1 crore, the interest rate shoots to 7.5 per cent. And one-year fixed deposit will fetch an interest of 9.75 per cent as against the 9.5 per cent one would normally earn.

Liquid Investments, Solid Safety

Escorts Mutual Fund will launch a liquid plan within the month. This scheme is aimed at individuals with a lower risk appetite. The plan doesn't have any charges in the form of any entry or exit load. The minimum investment required in the Escorts Liquid Plan will be as low as Rs 5,000, while subsequent investments will be in multiples of Rs 1,000. The objective, the company claims, is to generate a moderate current income by investing money in well-diversified and liquid instruments, like money market securities and fixed income instruments.

What are Gilts? They are government securities, or certificates, which are issued via the Reserve Bank of India whenever the government needs to raise money. A g-sec is known by its interest rate (also called coupon rate) and year of maturity. So if you hear a broker say ''GOI 2008@12 per cent'', what he means is that this batch of g-sec issued by the government will mature in 2008 and carries a 12 per cent rate of interest.

How much do Gilts pay? The yield currently varies 10 and 10.5 per cent, which is pretty high considering there is zero risk. The price of a g-sec is inversely related to its yield. As the yield goes up, the price of the security falls and vice-versa. PNB Gilts currently has two g-sec products with maturity dates of 2008 and 2014. Since the interest payments are half-yearly, Gilts are a good source of regular income for risk-averse investors.

How much can I invest in Gilts? There is no upper limit (the government needs all the money it can lay its hands on), but there is an entry ticket of Rs 25,000. Typically, investments are made in increments in blocks of Rs 25,000 only. If the entry fee sounds high it's because traditionally Gilts were the domain of large institutional buyers. It's only recently that the government has started hawking them to retail customers in a bid to make G-secs popular and lower its own costs of funds. As Arun Kaul, Managing Director of PNB Gilts says: ''We have a lot more queries from younger investors who want to spread their portfolios to avoid risk associated with equities.''

Do Gilts help save tax? Yes. There is no tax deducted at source, besides which you can claim interest income deduction up to Rs 9,000 under section 80l of the Income Tax Act. To give you a perspective, if you invest Rs 50,000 in gilts with a yielding of about 10 per cent rate of interest, your effective yield, because of the tax deduction, goes up by another half a percentage point.

Are Gilts liquid? Yes, again. Although a G-sec might have a maturity date several years into the future, it is not that you cannot trade in them. Buying and selling gilts is a relatively simple process, starting with your having to open a demat account (an electronic account) with a depository participant (See How To Buy And Sell Gilts). In effect, you can buy and sell G-secs on a daily basis.

Can I borrow against Gilts? Of course. Since the certificates are guaranteed by the government, all banks will lend you against those certificates. In fact, compared to about 50 per cent for loans against shares, G-secs allow you to borrow up to 80 per cent of the certificate value. So, if you run into a financial crisis, you don't have to sell your gilts; simply borrow against them.

How much should I invest in Gilts? Well, that's a call you need to make, depending on your financial requirements and investment temperament. We recommend that you devote a significant part (if not the chunk) of your investments to gilts. Like we said elsewhere, gilts are totally risk free. And, as Kaul mentioned, a whole lot of young investors are jumping onto the gilts bandwagon. And if you are the sort who absolutely hates the rough and tumble of equity market, you should be on it too.

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