Time was when choosing an investment was easy-you scarcely looked beyond government instruments or the bank and company fixed deposits (FDs). There were only debt instruments to choose from and they fetched steady returns of around 10-12 per cent. Back then, you were really pressed for choice. But with the economy taking off over the last four years, the stock market presented an attractive alternative to conservative fixed income investors. Stocks returned a strong debt-beating performance. At the same time, debt returns were dwindling as bank fixed deposit rates fell from 11 per cent to a miserly 6 per cent (see On the Rise). Debt was sidelined.

Now, it's back.

Times change. Thanks to the Reserve Bank of India's liquidity squeeze, interest rates are on the rise again. The fallout: A bank deposit is again promising you double digit interest rates. The rate hike that began last year has taken the bank interest rates on FDs up to over 10.5 per cent. Now, the rate hikes are nearly twice as much as the lows reached in 2003. That spells good news for fixed income investors.

Over the last year, many investors have been considering debt. Fixed maturity plans (FMPs) have been raking in the moolah since January this year. Some have even moved from equity to debt as the stock markets are priced quite high. There is little official data to suggest how much money has actually moved from equity to debt. Market watchers and analysts, however, speculate that in March alone, at least Rs 7,000-8,000 crore worth of retail money has gone debt-wise.

Broadly speaking, if you were to walk on the debt route, you have plenty of options before you. New alternatives such as FMPs to floating rate funds, in addition to six traditional options of government-backed savings instruments, many of which have not lost their charm. So how can you make the most of the current fixed-income atmosphere?

The Debt Scenario

On March 30, 2007, the Reserve Bank of India hiked repo rate by 25 basis points to 7.75 per cent and the cash reserve ratio by 50 basis points to 6.5 per cent in two stages of 25 basis points each. With this hike, there's been a flurry of activity in the debt market. Short-term interest rates have spiked up, while the longer-term rates have remained stable. The 10-year G-Sec yield is hovering around 8 per cent, whereas shorter-term rates have inched closer. What this means for investors is that sticking to the shorter-tenure deposits is more profitable than investing in longer-term paper.

Analysts advise against an overhaul of the portfolio and not over-tilt towards debt, if all you want to do is take advantage of the spike in interest rates. Over the long-term investment horizon, the current hike appears a temporary phenomenon. At this point, make the best use of short-term instruments. Short-term corporate bonds also saw their yields increasing over long paper.

"If you have a long-term horizon, say three years or more, stay invested in equities irrespective of your age" Sandesh Kirkire CEO/ Kotak Mutual Fund

On the other hand, if you are looking at a longer investment horizon of, say, more than three years, stock investment is the better option. "If you have a long-term horizon, say three years or more, stay invested in equities irrespective of your age," says Sandesh Kirkire, CEO, Kotak Mahindra Mutual Fund. Equities are typically a long-term play and offer the highest return as compared to any other financial instrument, over a period of, say, 15 years or more. "Risk associated with volatility effectively evens out with time," he says.

But for the safer conservative investors, there's much to be gained from a debt strategy that is tilted towards government securities and highly rated corporate bonds. Maximise your returns out of the brisk interest rate scenario primarily via short-term investment options.

The Gilt Route

Perhaps you can park your money in short-term bond funds or one-to-two-year gilt funds. These gilt funds invest exclusively in government securities and money market instruments that are of a shorter duration. As the yields have risen in the last 1-2 months, new investors in such funds will get higher returns.

The dual advantage of these funds is that there could be gains through the appreciation of the NAV (net asset value). If the interest rate on these short-term papers dip over the next six months or so, which is quite likely, short-term bond fund investors could make tidy returns through NAV increases.

"FMPs (fixed maturity plans) have been offering an average annual return (AAR) of over 6.5 per cent" Amandeep Chopra President and Head (Fixed Income)/ UTI Mutual Fund

The other option in the short-term is FMPs. These are, typically, fixed tenure funds that invest in bonds. The bonds mature at the same time the FMPs mature. Thus, investors will lock-in at higher rates. FMPs are closed-end funds with tenures varying from 15 days to over a year. "FMPs have been offering an average annual return (AAR) of over 6.5 per cent," informs Amandeep Singh Chopra, President and Head (Fixed Income), UTI Mutual Fund. Of late, the shorter-tenure FMPs make better options because of the higher yields they are currently offering. However, FMPs do indicate the returns but the final return depends on how the fund has invested its portfolio.

Bank on FDs

The trusted old bank deposit is also back. Banks have been offering 9-10 per cent returns on fixed deposits of less than a year or just about a year. For the extremely conservative investors, it's the better option. However, do check the tax-incidence on this form of investment if you are in the high tax bracket. This tends to reduce the yields on the investment.

Liquid funds offer another smart alternative to short-term FDs. Although AARs have just about reached 6.8 per cent mark in the last one year (while yields on the former have topped 10 per cent), liquid funds are redeemable within one working day and offer tax-free dividends (with a DDT or dividend distribution tax of 25 per cent), therefore, offering the twin benefits of moderate yields with high liquidity. "Within the debt portion of their allocation, one could invest 40-45 per cent in FMPs, 20-25 per cent in liquid funds, while the remainder can be a mix of medium-term and short-term funds," offers Chaitanya Pandey, Debt Fund Manager, ICICI Prudential AMC.

By the time you turn 45, say managers, you should be looking at an asset allocation of 40-60 in favour of debt. "Once you have 15 years of service left, an incremental shift towards debt is advisable," opines Rajiv Shastri, Head (Alternate Business), Lotus India AMC. At this stage, you might typically have a minimal appetite for risk, and consider safety and return with equal importance. The best option, then, for you would be to begin investing in bond funds. This guarantees a regular income and their NAVs typically fluctuate less than any equity fund. Bond funds normally invest in corporate papers, GoI (Government of India) papers, money market instruments and call papers and have recorded an AAR of 5.24 per cent in the last year.

But if you are among the senior citizens and safety of your asset is paramount, increase the allocation to debt. "At this stage, an investor should look at physically shifting some of his equity instruments into debt," suggests Shastri, "The remainder equity allocation will essentially tide you over inflationary pressures." If you are at this stage, gilt funds can be a viable option for you. These invest exclusively in government securities, including state government securities and treasury bills. They are safe and yield higher effective returns than direct investments in these securities.

Fall Back on Safety

"Once you have 15 years of service left, an incremental shift towards debt is advisable" Rajiv Shastri Head (Alternate Business)/ Lotus India AMC

But for the safety-first investor, there are longer-term options in the government savings schemes essentially marketed by the post office. You could consider government-promoted debt instruments like the Kisan Vikas Patra (KVP), which doubles your money in eight years and seven months at 8.25 per cent and has no TDS (tax deduction at source) on withdrawal. Whereas the KVP offers no tax benefits, schemes such as the National Savings Certificate (NSC) and the Public Provident Fund (PPF), both of which offer interest at 8 per cent, remain popular tax saving instruments.

Another good option, especially for senior citizens, is the Post Office Monthly Income Scheme with a maximum deposit limit of Rs 6 lakh and a maturity period of six years. It offers an annual rate of 8 per cent payable monthly. In addition to this, you could consider 8 per cent taxable GoI bonds issued by designated banks, which offer half-yearly interest payouts.

But post office savings instruments are long-tenure in nature, ideal for conservative investors, typically retirees. Returns here are fixed and they are not likely to change in the next year. But once you invest, you are locked-in at that rate. At this moment, investors have a good opportunity in investing in higher yields for the next one year and take advantage of the short-term spike in rates. Short-term bond funds and FMPs make attractive options. You might find fixed income worth it.

Subject to Many Risks
There's more behind a fund's standard disclaimer. Here's what you should know about the risks in your fund.

By Amit Mukherjee

"These days buyers do not take the idea of risk seriously. No one knows when the economic cycle will reverse" Himanshu Kohli Financial Planner/Client Associates

There's an oft-repeated disclaimer that vanishes off the tv screen faster than you can read it-mutual funds are subject to market risk, please read the offer document carefully before investing. But there's more to the standard disclaimer. There's a risk of the fund manager moving to another fund, or the risk of a takeover of the fund, or even of portfolio composition. So what are the various kinds of risks that your fund faces?

Market risk is totally dependent on the way the market moves.

If the market rises, you gain and vice versa. A fund can yield among the highest returns in its peer set in a runaway market by adopting an aggressive investment approach. But it could also end up losing it all when the market falls. This means that the returns are highly volatile. If an investor enters a fund when the broad markets are on a downslide, it could even lead investors to lose their principal. But if one invests in an uptick, there's money to be made.

Future, Not Past

But the bigger risk for an investor probably lies in how he perceives the performance of the fund. Fund houses often talk about the past performance of the fund to attract new investors. But past performance does not mean that the fund will perform the same or better in the future. "Investors are increasingly going by the past records and are overlooking the fact that these are market-linked instruments and are liable to fluctuate with the ups and downs of the market," warns Gaurav Mashruwala, a Mumbai-based financial planner.

More often than not, investors get swayed by the past returns. While this could be attributed to investors' lack of awareness, sometimes investors aren't informed about the negatives of staying in a fund. "Sometimes products are being wrongly sold in which investors are being only informed about their upside and not their downside," says Surya Bhatia, a Delhi-based financial planner.

A must-ask question is: will the market perform tomorrow and what is the expectation from the market? That's a call investors should take, and understand the risks associated with the call. Last few years were positive for almost all asset classes. "But when the economic cycle reverses, no one knows," says Himanshu Kohli, a financial planner with Client Associates. "These days, buyers don't take the idea of risk seriously," adds Kohli. Never be in a tearing hurry without knowing the fund that you are investing in. Says Mashruwala: "People sometimes invest in a hurry to avail tax benefits, and do not take the trouble of going through offer documents carefully."

"Knowing the objectivity of a fund before one allocates money is the first step an investor must take" Surya Bhatia Financial Planner

Portfolio Composition

Although there are rules that govern an equity portfolio composition, there's often the chance that fund managers could miss the opportunities of the market. A fund cannot invest more than 5 per cent in a stock or 10 per cent in a sector. Therefore, a fund has to diversify to reduce portfolio risks. But a fund can completely miss the performance route, if it has invested in stocks and sectors that aren't moving up in the market. Different stocks move at various times. If a fund has stocks that are largely placid in a booming market, the fund will under-perform the broader markets.

Therefore, a fund manager's skills and stock picking acumen are necessary while selecting a fund. A fund manager should be able to identify and invest in stocks that are out-performers in the market. In a sector fund, for instance, there's a sectoral concentration risk. If the sector does not perform, the investor loses out.

Therefore, keep tabs on the funds portfolio regularly and understand its limitations. Most investors don't. "This might lead to a problematic situation, though an investor actually never comes to know the exact fate of his money sometimes," says Mashruwala. In general, small, mid- and large-cap funds have three different risk factors, because they move differently. Besides, the benchmark to which the fund is attributed may not have the stocks that a fund has invested in.

For debt fund investors, there's a risk of default. If a fund has invested in poor-quality paper which yields higher returns, then there's the risk that the paper could default. A company can default on its repayments which makes the paper worthless. Thus the fund can lose out on its returns. Other risks, such as liquidity risks and an interest rate risk, could also affect your debt fund's performance. The interest rate movement in the economy has an inverse effect on the net asset value (NAV) of a standard debt fund. If the rate rises, bond NAVs tend to fall resulting in lower returns for the investor. On the other hand, for equity funds, there's the risk of volatility, which often leads to hasty decisions.

Keep an eye out on a fund's objectives. "Knowing the objective of a fund before one allocates money is the first step an investor must take," says Bhatia. The offer document outlines the investment parameters and objectives. "It is critical from the perspective of performance, deliverables and risk factors involved. And even more importantly from the asset allocation point of view an investor wants to maintain in his portfolio," he adds.

Other Risks

Fund managers are critical to the performance of the fund. But there's the risk of the fund manager leaving and a new fund manager completely changing the style of the fund. Of late, many fund managers have been shifting banners. "It's possible some investors allocate money to a particular fund manager and the fund manager changes the job. One option is to redeem and invest with a new fund. However, it would lead to some adverse costs like exit load/ entry load and taxes," Kohli asserts.

But one should also look at the fund house and the systems it has for portfolio composition. Says Bhatia: "If a fund manager switches jobs, it need not result in a switch from that fund. The fund should be put on the watch list and its performance should be watched carefully. What is more critical is to understand the systems and controls of the fund house within which the fund manager had been operating."

There's risk written over all funds. So while choosing investment options, it's an essential pre-requisite to understand the category of fund-either equity, or hybrid or a debt. Compare the fund with its peer set and with the market for, say, a two-year period. Your fund should ideally figure in the top quartile of its category. If it has done that, comfortably, then it has managed risks better.

Safe, Not Sorry
It offers the convenience of buying from home, but much can go wrong. Here's how to know your online shopping spree is secure.

By Rahul Sachitanand

Air tickets, flowers, jewellery, apparel and electronic accessories are among the many goodies that you can buy from the comfort of your living room, thanks to rapidly growing broadband. Retailers are also making their presence felt online with a host of new (retailing) websites mushrooming every day. But there's many a compromise for the unsuspecting online shopper and much e-pain can be avoided by following some simple rules when you are shopping online.

The online business is growing by leaps and bounds, which means that many new e-shoppers are turning online to its convenience. According to some industry estimates, the online travel business, valued at around Rs 9,000 crore, is the largest and fastest growing segment in the e-retailing market. Books, electronics and mobiles are not too far behind. But before you log on to bargain hunt on the net, here's what you should make sure for a safe e-shopping.

"A Rolex watch for Rs 2,000 is perhaps a clear sign that something's wrong" Subho Ray President/ IAMAI	"This area of online commerce is evolving and the laws are maturing with its evolution" Pawan Duggal IT & IP law expert

Secure Sites

When buying online, ideally stick to well-known sites. Shopping sites should have the latest 128-bit encryption technology, which ensures that the data is secure. This technology encrypts data in a way that is difficult to crack online. This data is then decoded at the merchant's end and processed. Online merchants who have products such as VeriSign to protect their consumer data also make the cut. "With the evolution of encryption technology, it is perhaps safer to give out your credit card details at a travel portal than in a small store or restaurant," claims Deep Kalra, Founder & CEO of makemytrip.com, a Sequoia Capital-funded travel and hospitality portal. Aside from asking for conventional details, several sites have begun to ask for additional information such as pin (Personal Identification Number) to ensure that details are genuine.

The Offline Network

For regular online shoppers, it may also be worthwhile to check if the merchant has a strong stocking or warehousing network and allows you to book or request for something that's currently unavailable. "We can source most requests in a couple of days since we have a strong offline presence," says K. Vaitheeswaran, COO, indiaplaza.com. Large online retailers such as Indiaplaza have a large customer base (one million, according to Vaitheeswaran) and sell Mysore silk sarees to Tata Sky direct-to-home (DTH) services on-site.

Frequent users of online commerce portals say that a key reason to stick with one site (or a brand) is the back end services that it can offer. These include the size and access to warehouses, ability to deliver product on time and perhaps most importantly the ability to accept refunds and returns without question. "More than technological issues such as payment gateways, consumers want these issues addressed," says Vaitheeswaran. A good way to check this is to call a customer service cell and get definite answers on the company's refund policy and the time taken to respond to queries. For example, Vaitheeswaran says, users can request for specific book titles or other products and the site will revert when it becomes available. "Online retailing has grown rapidly over the last couple of years and many of us have strengthened our back end and worked on logistics over the last few months to keep pace," says Dinesh Wadhwan, CEO, Times Internet, which operates the popular Indiatimes and Times Jobs portals.

Use Online Cards

Credit cards remain the most popular form of payments and executives say much of the hesitancy in detailing personal data online has worn off today, with improvement in security features and awareness of internet browsers. At the same time, some portals such as Indiatimes have launched their own co-branded cards with ICICI Bank to provide guarantee in case of an online fraud. "We launched this card a few months ago and it gives users a security of Rs 25,000 against fraud. We already have 2.5 lakh members for this," says Wadhwan, who points out that unlike the West, in India, banks don't protect against fraud.

"With encryption technology, it is perhaps safer to give out your credit card details" Deep Kalra CEO/ makemytrip.com	"We can source most requests in a couple of days since we have a strong offline presence" K. Vaitheeswaran COO/ Indiaplaza

Apart from that, portals offer payment-on-delivery services for their products. If you are a regular shopper, you can also use this facility. While there have been some newer forms of payments such as prepaid cards, akin to those used in mobile telecom, few portals have integrated their payment gateway.

Several stories on individual's credit card details being compromised and of online fraud have surfaced in recent times, but this is largely offline. "Most frauds happen when credit card numbers or other data is stolen offline and then used on the net for fraudulent activities," says Subho Ray, President of the Internet and Mobile Association of India (IAMAI), an industry body.

More often, buyers online are lured by great bargains. There's a punishment for websites that do fraudulent dealings, but with many websites mushrooming, it's best not to take chances. "This area of online commerce is evolving and the laws are maturing with its evolution," says Pawan Duggal, Managing Partner at Pawan Duggal Associates, and an expert on IP and it Law. So, carefully check the deals that appear too good to be true. Says Ray: "A Rolex watch for Rs 2,000 is perhaps a clear sign that something's wrong. But not everyone sees the warning signs."

NEWS ROUND-UP

Need a Pension Plan
It can put money in your hands in old age, but the reforms need to speed up.

Even as the government is trying to grapple with the problem of fixed returns in pension among its employees, a FICCI-KPMG paper has urged for reforms in the sector. The reforms would address a wider population, including those working in the private sector, and benefit millions of senior citizens. If pension reforms move forward, the industry could expand to Rs 4 lakh crore by 2025.

According to the paper, only 10 per cent of the country's labour was covered by government sponsored mandated schemes, and does not really generate adequate income even for this segment of retirees. The study paper has asked for international investments in a portfolio since it offers better diversification of pension portfolio and also possible higher returns.

Besides, participants have the freedom to select different plans (much like mutual funds) according to their risk appetite. The record-keeping work of pension operators should be with multiple players while various distribution channels should be encouraged-like post offices, NGOs, small retail chains, etc.

Says S.V. Mony, Secretary General, Life Insurance Council: "If the overall costs for the participants have to be reduced, existing life insurance companies, mutual funds, who have already achieved economies of scale, should be allowed to function as pension fund managers, with clear distinctions between the existing lines of businesses."

With mutual fund businesses aiming to maximise wealth subject to market risks and life insurance companies like LIC already in the annuity business, serious pension reforms still seem a distant reality. New pension products, however, could go a long way in increasing the income during retirement. But which are the new products and how the final pension segmentation shapes up remains to be seen.