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| Safety first: For the risk averse, Post
Office schemes may be just the thing |
The past decade hasn't been good for
fixed income schemes. First came a wave of scams involving non-banking
finance companies. Then came the fall, and fall, and fall in interest
rates. So, fixed-income schemes should be oh-so-five-years-ago, right?
Wrong. Most financial advisors believe fixed income schemes should
still account for 70 per cent of a high net worth individual's portfolio.
"We generally advise our clients to invest between 20 and 25
per cent of their assets in equity and the rest in fixed income schemes,"
says Rohit Sarin, Partner, Client Associates, a company that manages
investments of high net worth individuals. "That way, their wealth
can be preserved." And so, National Savings Certificates, monthly
income plans of banks, even RBI bonds remain popular.
At some level, all of us are risk averse. And fixed income schemes
hold the promise of liquidity, assured returns (never mind that
the magnitude cannot really be compared with, say, equity), and
come with the added benefit of tax cover. Consider NSCs. They assure
investors a return of 8 per cent (compounded half-yearly for six
years), and tax rebates under Sections 88 and 80 of the Income-Tax
Act of 1961. There's no ceiling to the amount that can be invested
and the scheme provides for premature withdrawal in four years.
Thus, a person who invests Rs 1,000 in NSCs can earn as much as
Rs 1,586.87 in six years. What more could a risk-averse individual
want?
Or, consider RBI bonds that promise a tax-free return of 6.5 per
cent on five-year bonds or the Post Office Savings Scheme that does
8 per cent. "You cannot exclude such schemes from your portfolio
unless the government withdraws them," says K.V.S. Manian,
Head (Retail Liabilities), Kotak Mahindra Bank. These returns do
look insignificant when compared to the 83 per cent returns on the
Sensex an investor would have earned had he invested in the Sensex
stocks (in a proportion equal to their weightages in the index)
on April 1, 2003, and divested on March 31, 2004, but as Pradeep
Dokania, Executive Vice President, DSP Merrill Lynch, points out,
"It is extremely difficult to time the market perfectly or
predict, with any amount of certainty, what is going to happen in
the next two to three years." Investment advisors, however,
believe investing in fixed income instruments through mutual funds
is a preferred option to doing so directly. One reason: it is easy
to enter and exit mutual funds; most fixed income schemes have some
kind of lock-in period (three years for RBI bonds, for instance).
Another: it allows investors the luxury of investing in government
securities. And a third: it helps save on taxes since it is now
the fund, and not the individual investor, that pays dividend tax.
Caveat: With an increase in interest rates imminent, investors
should park their funds in fixed income schemes of short duration.
"The idea is to enhance one's flexibility and shift to deposits
offering higher returns," explains DSP Merrill Lynch's Dokania.
Good point, that.
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