Debt options for different investor classes

M.V.S. SANTOSH KUMAR | Updated on March 05, 2011

Family members eating food on a dining table. Photo : N. Sridharan   -  THE HINDU



Going with the view that interest rates are not going to rise very much from here, what should investors do? People with different risk appetites may need to follow differing strategies:

If you are a Senior Citizen

It is likely that more investors will fit the ‘senior citizen' description now, as the age bar has been reduced to 60 years from 65 years in the Budget.

Given that you would typically be in the low-income-tax bracket and have a low risk appetite, you can consider locking into long-term bank deposits.

Deposits of banks for 3-5 years can be considered. Public sector banks such as Corporation Bank, IDBI Bank and State Bank of Travancore offer the best options here, with rates of 9.95 per cent, 9.75 per cent and 9.75 per cent respectively, for senior citizens.

Even after accounting for a 10 per cent tax, they will manage inflation-beating returns of 8.75 per cent every year.

SBT is strongly recommended, given that it will be merged with SBI going forward. Old private sector banks may not offer the best rates for the long term.

These deposits are perfectly safe, assuming you cap your investment at Rs 1 lakh in each account.

Up to Rs 1 lakh invested in each bank account is insured by DICGC. Opt for annual payouts for steady income.

Other attractive options are special deposits for 1,000 days from SBI, 1,100 days from IDBI Bank and 990 days from ICICI Bank, with rates of 9.75-10 per cent.

If you are a high net-worth individual

You may have to settle for low returns from fixed-income instruments, given that your interest receipts are taxed at 30 per cent.

You should, given this fact, allocate a portion of your portfolio to equity investments to pep up returns. However, there are some options which continue to give HNIs relatively good returns.

Consider bonds that offer tax savings, as far as the Rs 1.2-lakh annual investment limit (under 80C and 80 CCF) allows you.

Apart from these, you could also look at debt mutual funds, especially fixed-maturity plans for one year or so, and short-term income funds. These may deliver yields akin to short-term fixed deposits but with lower tax incidence.

Another option for such individuals is flexi or dynamic bond funds, which have now shifted to shorter-term instruments. However, as an HNI you may have to actively manage your debt portfolio to beat inflation, unlike the senior citizens. Tax-free bonds of Rs 30,000 crore to be raised next fiscal by financial institutions may also be an attractive option.

If you are leveraged

With the rising rates, your EMI (equated monthly instalment) obligations will rise.

Therefore, if you have a surplus, you should invest only if it can earn a rate of interest better than your interest outgo (adjusted for tax savings). Those of you who are burdened with a high rate of interest on housing loans should consider high interest deposit options from small banks or non-banking finance companies (though these carry higher risk) for shorter terms.

As these give high yields, the cash flows from such instruments can compensate for your interest outgo.

Current one-year rates on Shriram Transport and Dewan Housing deposits are at 9.25 per cent and 9.5 per cent respectively. Special deposit options of smaller banks, such as for 444 days by City Union Bank (9.8 per cent), Karnataka Bank's one-year deposit (9.75 per cent), Karur Vysya Bank's 555-day deposits (10.25 per cent) too are attractive.

Such investors can also consider debt-oriented balanced funds and monthly income plans of mutual funds.

If you're a young investor

If you are in your in early 20s, you should be able to assume a little risk, by adding an equity portion to your investments.

Assuming you fall in the 10 per cent tax bracket (less than Rs 5 lakh income after deductions), you are better off actively managing your deposits.

The host of deposit instruments from the likes of Karnataka Bank, Karur Vysya Bank, CUB, Tamilnad Mercantile Bank, and so on, offer decent yields in the short term.

Apart from these, debenture and bond issues that lock in your money at attractive rates (such as the recent SBI Retail Bonds) should be considered, as you don't immediately need the money. Maximise your yields with NBFC deposits and company deposits such as those from Unitech.

Published on March 05, 2011

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