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Four investment picks this Diwali

Rajalakshmi Nirmal Anand Kalyanaraman Yoganand D Satya Sontanam | Updated on October 23, 2019 Published on October 19, 2019

The past year has been quite torrid for investors, with slowing growth, geo-political tensions and problems in the financial sector taking a toll on almost all asset classes. Since investors may prefer to play it safe with their muhurat investments, we have selected two fixed-income options, one large-cap mutual fund and a gold investment this year. Happy Diwali!

Sovereign Gold Bond: More solid than physical gold

This Diwali, if you want to put your money in a glittering asset, go for sovereign gold bonds (SGBs).

These bonds are the most attractive route to investing in gold as you get to enjoy benefits that are over and above what gold can offer, in terms of an increase in market price. Benefits include a coupon of 2.5 per cent on the face value of the bond and no tax on capitals gains on redemption.

The Centre has timed the next issue of SGBs with Dhanteras; the issue will be open between October 21 and 25 (series VI).

The RBI issues gold bonds in denominations of one gram of gold or multiples thereof. The issue price of the gold bond is fixed based on the price of gold (999 purity) on the last three working days of the week preceding the subscription period. The RBI normally offers a discount of ₹50 per gram on the issue price to those who apply online and pay through the digital mode.

The tenor of the bond is eight years. On maturity, the redemption price is based on the average closing price of 999-purity gold on the previous three working days, as published by the India Bullion and Jewellers Association.

Attractions

Traditionally, Indians invest in the physical form of gold. But physical gold has many hassles such as safe-keeping, additional costs during purchase (such as making charges) and lower returns while selling (due to wastage charges). Further, there are also quality-related issues as not every piece of jewellery is hallmarked.

An alternative to physical gold is gold exchange-traded funds (ETFs) and SGBs — both of them are paper forms of gold wherein the metal can be stored in a demat account. While gold-ETFs — which are gold-backed ETFs of mutual fund houses — come with fund management charges and brokerage costs, sovereign gold bonds do not have such charges. However, if you exit the bond pre-maturely in the secondary market (discussed below), you will have to pay the broker for executing the sale.

In the case of gold ETFs, on sale, you either pay short- (as per the slab rate) or long-term capital gains (at the rate of 20 per cent, with indexation benefit). Capital gains on redemption of SGBs on maturity is exempt from tax. On the liquidity front, however, gold ETFs score over SGBs. Though SGBs are also listed on the secondary market and let you exit at any time from the date of listing, the volume is not good enough after the first few months of listing.

The RBI gives an option for pre-mature exit/encashment of the bond from the fifth year onwards. For this, one needs to approach the concerned bank/SHCIL (Stock Holding Corporation of India) office/post office/agent through which the bond was purchased, at least a day prior to the coupon payment date, and make the request. Note that this will be considered only as redemption and not transfer, and thus there will be no capital gains tax. Only if you exit the bond via the secondary market will you be asked to cough up capital gains tax. Another attraction is the coupon payment — at the rate of 2.5 per annum —- on the bond’s face value. So, unlike physical gold and gold ETFs, in SGBs, your return will always be higher than the market price returns in gold. This interest is, however, taxable at the slab rate.

How much to invest

Gold should always be seen as a portfolio diversifier. Investing 10-15 per cent of the portfolio in gold is always a good idea. Considering the fundamentally strong medium-term outlook for gold, the weak dollar and the stuttering US economy, one can invest in gold.

Small Finance Bank FD: Pips larger peers on rates

With equity investments turning volatile of late, you may be wanting to put some money in fixed-income options. FD schemes from small finance banks (SFBs) are an attractive option if you value stability in returns and adequate safety. SFBs usually offer interest rates higher than those offered by most public and private sector banks.

Consider a two- to three-year FD.

For a two- or three-year tenure, SFBs offer interest rates in the range of 7.6-9 per cent. As of today, FDs offered by Fincare SFB, with returns of 8.75-9 per cent for the said tenure, is the best of the lot. It is followed by Suryoday SFB, which offers 8.5-8.75 per cent on its FDs.

While most public sector banks offer only about 6.5 per cent interest rate for this bucket, private sector banks give up to 7.15 per cent.

NBFCs vs SFBs

But a few non-banking financial companies (NBFCs) offer interest rates similar to what is being offered by SFBs. Shriram Transport Finance, for example, offers a similar 8.5-9 per cent effective yield for the said period, and is among the best among NBFCs. But the risks attached to NBFC FDs are greater due to ongoing liquidity issues.

Besides, NBFC deposits do not carry any insurance cover. SFB deposits are covered by the Deposit Insurance and Credit Guarantee Corporation of India. Each depositor is insured up to ₹1 lakh for both principal and interest.

Thus, deposits in SFBs is a good option for those who don’t have much appetite for risk. Investors can park a portion of their surplus in this scheme. The two- to three-year tenure option is advisable, for it leaves open the opportunity to re-invest at higher rates if interest rates move up over the medium term.

Further, all SFBs offer senior citizens an additional 0.5-0.6 per cent interest over and above the FD rates being offered.

While demonetisation had impacted the performance of small finance banks, the performance of most players has improved significantly over the past year. However, raising low-cost retail deposits has remained a challenge, owing to which these banks continue to offer higher interest rates than traditional banks.

But remember, small finance banks that have just started expanding their footprint across cities, may not be able to offer you transactional comfort like your friendly neighbourhood bank. So, check the presence of these banks in your city before investing.

National Savings Certificate: For risk-free, healthy returns

This Diwali, if you are looking for a safe, tax-efficient investment avenue for the medium term, you must consider the five-year National Savings Certificate (NSC) offered by post offices, especially if you have not exhausted the investment limit under Section 80C (₹1.5 lakh a year). The NSC is a good choice for many reasons.

Benefits

One, the NSC currently offers a healthy 7.9 per cent per annum — higher than what most banks offer on their fixed deposits, including tax-saving five-year deposits. Rates on small savings schemes, including the NSC, were left untouched for the October-December 2019 quarter, contrary to expectations of a cut. An investment in the NSC will earn the prevalent interest rate at opening (7.9 per cent during October-December 2018) until maturity.

Two, the NSC investment carries zero risk. Unlike bank FDs that have insurance cover up to ₹1 lakh, the entire NSC investment is guaranteed by the government. Three, the NSC is open to all Indian residents — unlike some other small savings schemes that are only for the elderly (Senior Citizens Savings Scheme (SCSS)) or those with young daughters (Sukanya Samriddhi Scheme).

Four, you can invest any amount in the NSC — there is no cap such as the ₹1.5-lakh a year in the case of the Public Provident Fund (PPF).

That said, the deduction under Section 80C is restricted to ₹1.5 lakh a year across investments, including the NSC.

Five, with a tenure of five years, the NSC has a goldilocks investment horizon — not too short such as short-term bank FDs or not too long like the 15-year PPF.

Six, the NSC is a cumulative instrument that compounds interest annually and can help build a good corpus over the five-year period.

But the lack of periodic payouts makes the product unsuitable for those seeking regular income.

High effective returns

Finally, the effective returns on the NSC can be quite high, thanks to the Section 80C tax break available on the investment and also on the interest for the first four years that is reinvested. In effect, only the last year’s interest is taxable. Considering the tax break on both the investment and the interest, the post-tax effective annual return is 8.9-18.4 per cent for those in the 5-30 per cent tax slabs.

To claim the interest re-invested in the first four years, under Section 80C, you must first declare it in the tax return and then claim the tax deduction. There is no tax deducted at source on the fifth year’s interest, but you must pay tax on it on your own. If we consider only the tax break on the NSC investment and not on the interest, the post-tax effective annual return is 8.6-15.7 per cent for those in the 5-30 per cent tax slabs. If you have exhausted your Section 80C limit without the NSC investment, the effective annual return (pre-tax) on the NSC will be the coupon rate, that is, 7.9 per cent currently.

And then, tax will apply on the interest, making the post-tax return 7.5-5.4 per cent in the 5-30 per cent tax slabs — relatively low but still higher than the post-tax returns on most bank FDs.

Axis Bluechip Fund: A penchant for quality

Mutual funds are a good route to long-term wealth creation. This Diwali, you can consider purchasing Axis Bluechip Fund, formerly Axis Equity. It is the topper in the large-cap category and has delivered 21 per cent returns over the past year. The fund has outpaced other large-cap funds such as ICICI Prudential Bluechip, SBI Bluechip and Aditya Birla Sun Life Frontline Equity and HDFC Top 100 over the one-year period.

The large-cap category has been quite resilient despite the bellwether indices, the Sensex and the Nifty, turning volatile after recording new highs in early June. Over a three-year period, equity-oriented large-cap funds have delivered average returns of 9.13 per cent, beating multi-cap as well as large- and mid-cap categories which clocked returns of 7.3 per cent and 6.5 per cent, respectively.

Axis Bluechip is benchmarked against the Nifty TRI and has consistently outshone the benchmark. The scheme is placed among the top-quartile funds within the large-cap category over three-, five- and seven-year periods, and has delivered steady returns over its eight-year track-record.

BusinessLine Star Track Rating for Axis Bluechip is five-star. It has been able to deliver stable returns aided by adroit asset-allocation shifts. Aside from an underperformance in 2016, it has given excellent returns over the long run and across market cycles, limiting the downside well.

Proven record

The scheme’s year-to-date return is 14.8 per cent, beating the benchmark by a wide margin of 8 percentage points. It predominately invests in giant and large-cap stocks that are growth-oriented. These stocks are frequently traded and therefore liquid and less choppy. Large-cap firms have proven track record, business models and ability to deliver consistent returns.

The scheme mainly invests in banks and financial services sectors which clubbed together accounts for about 40.7 per cent of its assets, followed by consumer goods and IT with 15.9 per cent and 12 per cent, respectively. Top stock holdings such as HDFC Bank, Kotak Mahindra Bank, Infosys and Bajaj Finance have yielded good returns over the past year.

To conclude, Axis Bluechip seeks to outperform the benchmark with risk that is lower than the benchmark’s. Investors can explore the SIP route for investing and hold the fund as part of their core portfolio. The fund has the potential to beat inflation as well as generate wealth. Holding this fund gives investors an indirect exposure to diverse sectors and also to some of the top bluechip stocks such as TCS, RIL, L&T, Asian Paints and HUL.

Published on October 19, 2019
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