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Suresh Krishnamurthy

The high-administered rates on small savings options may be available only for a few weeks more. When administered rates decline, yields on competing options may decline too. So, advancing investment plans appear to be in order in the case of most debt investments.

ADMINISTERED interest rates on small savings are now the saviour of the conservative Indian investor in more ways than one. They offer higher yields to investors than other investment options; they are also the reason why interest rates on other investment options, such as bank term deposits, are now stable and not falling.

However, administered rates are also highly likely to be marked down by about a percentage point, though this is an election year. Investors would do well to take advantage of the higher rates available now.

Importantly, the window of opportunity for investors is closing rapidly and may close sooner than one can think. In 2000, interest rates were changed in January, ahead of the Budget in February.

If the Finance Minister opts for a similar strategy, investors may be left with only a few weeks to invest in these high-yielding products. So, better hurry.

In addition, changes in administered rates might unleash another round of decline in yields on investment products for retail investors.

Most analysts are of the opinion that interest rates have stabilised and will not decline further in the next 3-6 months.

However, this view may be applicable only to the government securities market and not to retail investment products.

So, investors in guaranteed return products such as tax savings bonds, insurance products such as Bima Nivesh Triple Cover, or term deposits in banks and housing finance companies might be better off advancing their investment plans.

Attractive yields: For the non-tax-payer (that is, people who do not pay taxes for various reasons, including low income or the availability of deduction under section 80-L) and investors paying tax of only 10 per cent on his interest income, the various investment options that offer attractive yields now are:

Post-office monthly income scheme offering a yield of about 8.5 per cent when the monthly income is reinvested in post-office recurring deposit scheme;

National Savings Certificate and Kisan Vikas Patra which offer yields of between 8 and 8.4 per cent;

Post-office time deposits, which offer 6.25 per cent for one year and 7.5 per cent for five years; and

RBI Taxable Bonds offering yields of 8 per cent;

For the investor paying tax of 30 per cent, some of the attractive investment options are:

Provident funds, including voluntary contributions to employee provident funds. The tax-free yields are likely to remain attractive even after any rate cut;

RBI tax-free Relief Bonds, which offer yields of 6.5 per cent;

Bima Nivesh Triple Cover which offers tax-free yields of about 6.5 per cent for 10 years with the option to surrender at the end of third and sixth years;

For the investor paying tax of 30 per cent on his income, if any investment is to be more attractive than that mentioned above, then they have to offer yields in excess of 9.25 per cent.

Dealing with rate shock: Though yields on small savings are set to decline, one of the major concerns facing conservative investors right now is the prospect of a rise in interest rates 12 or 24 months down the line. Many investors are considering if it would be right to park their surplus in short-term securities now and invest long-term when rates rise.

However, such a course of action may prove short-sighted for a couple of reasons.

One, when the interest rates will rise and the extent of the rise are not known.

The liquidity in the system is comfortable and the prospect is only for stable rates. In this backdrop, hoping for a rise in interest rate does not appear prudent.

Second, let us suppose rates do rise after 24 months. The interest rates then have to rise by at least 2 percentage points to provide you any benefit.

If it rises by less than 2 percentage points, then investing in long-term investment options now would provide you with a better yield.

Several studies in the US have proved that investing in long-term securities consistently at all times, when you don't need the money, is the best way to earn more.

In any case, floating rate mutual funds offer an attractive avenue for taking advantage of any rise in interest rates.

Given the view for stable interest rates, parking a portion of your surplus in floating rate funds appears attractive now.

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