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The new investment avenues
Smita Tripathi | July 17, 2004 13:55 IST
Narendra Shukla, a Delhi-based garment exporter has been a cautious, play-it-safe investor all his life. That's why, in recent years, he has poured almost all his carefully hoarded savings into the 6.5 per cent tax-free RBI Bonds.
To spread his bets slightly he also put small sums in National Saving Certificates and a minuscule sum in the stock market. Says he, "I'm a very cautious investor and don't believe in taking risks needlessly."
But Shukla is now in a dilemma. The government has just scrapped the 6.5 per cent tax-free RBI Bonds, which had become the favourite savings instrument of the super-safe investor. As a result investors like Shukla are now looking at how to restructure their portfolios.
In recent years the 6.5 per cent tax-free RBI Bonds have become a very popular saving instrument -- especially amongst high net worth individuals. Till 1996, these bonds gave returns of 10 per cent. This came down to 9 per cent and then 8 per cent and then in 2003 it was reduced to 6.5 per cent.
However, with inflation at 4 per cent, the return offered by these instruments was still attractive and the proof of that came in April when nearly Rs 3,800 crore (Rs 38 billion) worth of RBI Bonds were sold.
However, with the scrapping of these bonds, safe investment options for high net worth individuals (HNIs) have become very limited. In fact, there are few safe options left for conservative savers.
Take a look at what is happening. Debt funds which were said to be relativley risk-free are giving negative returns. Monthly Income Plans offered by mutual funds are also not attractive as their portfolio is made up of 80 per cent debt and 20 per cent equity. With debt giving negative returns and returns from equity becoming stagnant, the returns from MIPs are also negative.
So where should high net worth individuals park their money now? "The 8 per cent taxable RBI Bonds seem to be one of the best options right now for HNIs looking for a safe avenue," says Anil Kumar Chopra, CEO, Bajaj Capital.
For a person in the 30 per cent tax bracket, the 8 per cent RBI bonds will give returns of approximately 5.6 per cent. Though this is much lower than the previous 6.5 per cent, it is still a better bet than most other options.
If you invested Rs 10 lakh (Rs 1 million) in the 6.5 per cent RBI Bonds, after five years you would have got Rs 13,77,000. In case of the 8 per cent taxable bonds, your Rs 10 lakh will give you returns of Rs 13,91,600 after six years.
This is after having deducted 30.60 per cent tax (this includes the 2 per cent educational cess that is now applicable). Remember, these bonds have a lock-in of six years compared to five years for the 6.5 per cent bonds.
If you are a senior citizen, the Senior Citizens Savings Scheme offering a 9 per cent yearly interest is a good investment option. The scheme announced in the Budget will be launched on August 1 and is meant for people above the age of 60. However, this scheme has a maximum deposit limit of Rs 15 lakh (Rs 1.5 million) while RBI Bonds do not have any limit.
In this case, the term for deposit is five years with a facility for premature withdrawal. The 9 per cent returns are subject to tax, so if you are in the 30 per cent tax bracket, you will effectively get returns of 6.3 per cent.
Another option recommended by financial consultants is the 100 per cent Floating Rate Bond Fund offered by mutual funds. Basically, these funds invest in floating rate instruments and therefore have a direct correlation to interest rates.
If interest rates go up the returns from these funds rise and returns fall with a fall in interest rates. This is unlike debt funds, where there is a reverse relationship between interest rates and returns. A rise in interest rates results in a fall in returns.
Says Chopra, "With interest rates likely to harden in the short to medium term, the Floating Rate Bond Funds are a good option."
In the current scenario, these funds are likely to give returns of 5 per cent to 5.5 per cent. The dividends are tax-free in the hands of the investor and most importantly, there is complete liquidity. Again, there is no limit on the amount that can be deposited. Also, there is hardly any volatility making it a safe option.
If you are willing to take a bit of risk, you can divide your portfolio in such a way that 80 per cent is invested in floating rate bond funds and the remaining 20 per cent in equity.
"That's like having an MIP except that instead of 80 per cent in debt and 20 per cent in equity, here the 80 per cent is in floating rate bond funds," says Chopra.
Chopra reckons that such a portfolio can give you returns of between 6.8 per cent to 7 per cent.
Then there are NSCs and the Kisan Vikas Patras which also give returns of 8 per cent so for those in the 30 per cent tax bracket, it works out to 5.6 per cent. Here too there is no limit on the amount of deposit.
However, here the interest is posted only at the time of maturity. So it is not a good option if you want regular returns. On the other hand, RBI Bonds give returns every six months.
So, depending upon their risk profile and need for liquidity, HNIs will have to decide on their portfolio. For anyone below 35 years, financial consultants recommend putting 20 per cent in RBI Bonds and 20 per cent in NSCs, KVPs and the like. Then, they suggest, 20 per cent in floating rate bond funds and the remaining in combination of floating rate bond funds and equity.
But for those above 35, financial consultants advocate putting nearly 40 per cent in RBI Bonds, 30 per cent in NSCs, KVPs and the like. And the remaining 30 per cent in floating rate bond funds.For those above the age of 60, 40 per cent must be put in the Senior Citizens Scheme (of course, this is up to a maximum limit of Rs 15 lakh), another 40 per cent in RBI Bonds and the remaining 20 per cent in floating rate bond funds, so that one has some liquidity.