Best avenues for recent times

There is a saying that “Certain things need to be in certain place in order to maintain safety & value”. Money is also needs to be kept in particular place in order to protect its value. But, many of us are having huge sum of money lying idle in a Saving Bank Account, where we get meagre interest rate of 3.5%P.A. But the current Inflation rate ranges between 8 to 8.30%, which is far ahead of what we are getting from saving bank Accounts. This will eat out our capital & make our money’s value less.

Many people think that parking one’s hard money in Saving Bank accounts is the only safest option available in India. But, in reality, there are numerous opportunities/avenues available to park your money which provides much required safety & at the same time also provide high returns at least as compared to normal Savings Account. Here, I am going to discuss about two avenues, namely Auto-Sweep & Fixed Deposits:

Auto-Sweep

One of the best avenues to park our money can be, by availing Auto Sweep Facility. This facility offers you high interest rate & offer liquidity like Saving Account.

It’s a combination of a regular Savings Bank Account with the high Yield of Fixed Deposit.

Here, an amount in excess of predetermined amount is automatically transferred to a Fixed Deposit.  Thus, you can earn a high interest rate on such amounts. This Process is called Sweep In.

When you need more money and want to withdraw, such Fixed Deposits are automatically broken and you can withdraw just like normal Savings Bank Account. This process is called Sweep Out.

Since Deposit are broken down in units of Rs.1/-, you will lose interest only for the actual amount that has been withdrawn. Amount & Tenure for Auto Sweep Facility available for various time periods, hence, one can choose according their needs & convenience.

These types of facilities provide interest rates up to 6% to 7 %( in current scenario), which is double than Savings Account.

This may not able to beat Inflation, but is better than 3.5% you can get from normal Savings Account.

Most of the banks in India provide this Auto-Sweep facility, for details contact your respective Bank.

Ideally, one need to park at least 3 months of one’s expenditure as a contingency/emergency fund in Savings Account, in order to meet unfortunate emergencies or job loss. But, few people may think, that why do we needs to park, so much money in an instrument which pays interest of only 3.5% p.a? For these kind of people, Auto-Sweep Facility will do wonder.

Bank Fixed Deposit

Bank Fixed Deposit is considered one of the best & safest products available in our country. At present scenario, banks offer Interest rates from 8.5 to 9.5%. For Senior Citizens, some banks even offer interest rates up to 10.0%. So, for people, who are having cash in their Savings Account, more than three months expense can opt to invest in safe haven-Bank Fixed Deposits, to benefit from attractive interest rates. In fact, a person who comes under the 10% tax slab can consider investing in fixed deposits, which offer returns up to 9.5%p.a, which means tax adjusted return of 8.5%.That, is the return offered by PPF (when one keep on remaining invested for 15 years).Hence, people who comes under the 10% bracket may even consider diverting some percentage of money which is supposed to be invested in PPF towards Fixed Deposit in order to avail benefit from rising interest rate.

Last, but not the least, having more money in Savings Account idle, will make your hard-earned money succumb to Inflation pressures. So, try above avenues & use rising interest rates to your advantage.

Capital Protection Oriented Funds

Capital Protection Oriented Funds are offered by mutual fund companies. In these schemes, fund manager invest around 80% of investor’s money in fixed income instruments like bonds, FDs debentures, corporate bonds, govt securities etc. with an aim to protect investment and remaining amount (around 20%) is invested in equities/shares, which gives opportunity to participate in growth.

Maturity
 

These schemes are generally ranges from 3 to 5 years

Characteristics

• These are Close-Ended Schemes, hence available for investing during offer period only.
• It is listed in Stock Exchange & hence has option for exit, but offers much less liquidity.

Risk Factors

Market Risk:  Since these schemes invest around 20% of asset in equities, which are high risk instruments.

Interest Rate: Interest rate may fall before money is invested and funds will have to be invested at a lower rate.

Credit Risk: Downgrade brings down the price of securities as investors demand a higher price on the asset leading to higher credit spreads.

Advantages

• Comfort of Diversification (i.e., debt and equity investments)
• Low interest rate risk, since debt portfolio held till maturity
• Low Credit risk, since debt portfolio will not invest in real estate & IT sector, which are prone to more volatile performances.
• Gains made through investment in these schemes are treated as Long-Term Capital Gains & hence eligible for Indexation benefit, which substantially decreases investors’ tax outgo. According to this, tax will be charged only 10% without indexation or 20% with indexation, whichever lower is chargeable. Hence, it is considered better than Fixed Deposits, since returns generated by FD are taxable at 30%.
• At present Scenario, interest rate on debt instruments are ranges from 9 to 10%, hence, investing in these funds makes sense, because debt portion to be around 80% of the portfolio.

Assumption on which it works

For example take three year fund. Start with Hundred Rupee and Rs 80/- in Fixed Deposits with the remaining Rs.20/- make an investment in Equities. In three years, the 80 would have grown to just over 90 and 20 would, even in the absolute worst case, be very unlikely to fall below 10.That gives you your capital back. But, that’s worst case. In reality you could legitimately expect that 20 to grow in three years.

Who should invest in this?

• Individual or Corporate Investor, who comes under highest tax bracket of 30%, since this will enhance the level of post-tax returns on any wealth created by the fund.
• An experienced equity investor, sitting idle in saving/current bank accounts after booking profit from equity market. He/She could generate further gains, while protecting capital.

In General, the risk is very low, but not zero. The Capital Protection Oriented means that they are designed to be risk-free but that’s not a guarantee. There could well be problems in the debt part of the portfolio which actually leaves investors with a loss. Although, a chance of this happening is admittedly low, due to AAA rating debts (most of these funds invest their debt portions in AAA rating securities).

Note: Purpose of this article is only to give broad idea  about the product.So, Please consult your financial planner / investment advisor before making any investment decision.

Why Do We Invest?

“Investment”, why investment is needed? Who needs investment? What purpose this investment serves? Who are the people benefits through investment? Why do governments support investment?  Did you thought about this?  Don’t know answers for these questions? Then read this ….

Investment is needed for companies/ institutions /corporations for developing their businesses. For example, ‘A’ starts a retail store called ‘X’ in a small town and does business for three years successfully generating good profits hence wants to expand his business  in other main cities of the country also. But, for that huge amount of moneys is needed. For example, assume money needed to expand retail store in other cities is Rs 50 crore. For getting that money, Company X may various options like, borrowing from relatives, friends, banks etc. 

Borrowing from banks will not proof beneficial, since X needs to pay interest for borrowed money, which will eat out the profit of the company or even it can results in negative cash flow(due to Interest payment), if company goes into losses in initial phases of expansion. Hence, borrowing from banks cannot be a better option.

As far the option available of borrowing from relatives & friends is concerned, it may be not possible to borrow huge sum.

In this situation, the X Company can seek help of Investment Concept (here, Share Market). Here, the company approaches Sebi, the capital market regulator of India(which regulates share markets like RBI does with banks), with track record report of successful business and future plans for expansion in order to approach public to generate required sum through(share market) Initial Public Offer. IPO involves issuing/selling shares of the company to the public for their money. Sebi, after scrutinising the company’s record, approves the company to go on with IPO. Then people invest their money in the Company X, and in return people who invest in it get shares in proportion to the amount invested. By this way, company raises precious capital that too without paying any Interest.

When a company expands through this investment, it creates more employment, which in turn increase productions and generate more wealth for its shareholders. When company generates more wealth, then government will begins to get more taxes from company. When government stands to gain, then whole country stands to gain, since government would have surplus to allocate more funds to creating better infrastructure for its people.

Other means of investment instruments available through which companies able to generate capital for doing their business or expanding their business are: Fixed Deposits, Bonds, Debentures, Corporate Deposits etc.

I hope, by reading this article, you got answer for "why do we invest?" who are the beneficiaries, why Govt supports Investment?

Note: Main purpose of this article is to make understand individuals about the importance of Investment for the country as a whole. Please note, it does not mean you have to invest in particular instrument only keeping this in your mind. After all, everybody have different level of risk taking abilities & hence needs to invest accordingly, that too analysing what are the pros & cons of particular investment avenues.