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Go for cheap investment options
Joydeep Ghosh | February 24, 2009 14:11 IST
'Cash is king' has been motto of many investors for almost a year now. With the equities markets sliding quite sharply since January 2008, they have decided to take the flight to safety. But for many, there is a perpetual question if they should park their cash with only banks.
Sanjay Bakshi (name changed) has been contemplating selling his property in Pondicherry for some time. His investment has already quadrupled in the last decade. Lately, his friends have been advising that he should to get rid of it and keep the cash in a 'safe public sector bank'. The reason: They expect the property market to worsen, which would erode his existing profits.
But Bakshi's reasoning is that keeping idle money in a 'safe public sector bank' would give him returns of only 3 per cent (savings account rate).
He approached his financial advisor for a solution, who told him about several instruments, including equities. But given the uncertainty in the equities market, Bakshi's main concern was quick entry and exit, and at a minimum cost (read tax) and capital loss.
Here are some of his options.
Short-term bond fund: Since the Reserve Bank of India's [Get Quote] indicative rate cuts in the last few months, the interest rate has been falling steadily. According to experts we are looking at a lower interest rate regime, at least in the short-term. No wonder, returns from these funds have been impressive.
Also, they are less volatile than medium or long-term bond funds because they hold securities of lower maturity. In the last one year (week ending February, 19), the category average returns has been 10.39 per cent, with the best funds offering almost 15.5 per cent. Over a six-month period, they have returned 6.92 per cent.
If investing, go for the dividend reinvestment option. Most of these funds give dividends on a monthly basis. The dividend distribution tax (DDT) is 14.16 per cent and deducted by the fund house. That is, the amount is tax-free at the hands of the investor.
Entry load: Nil
Exit load: 0.25 � 0.5 per cent before a certain period (mostly 7 days or a month)
Short-term tax (under one year): 33 per cent on capital gains (for the highest income tax bracket)
Long-term tax (over a year): 11.33 per cent without indexation, 22.66 per cent with indexation
Arbitrage funds: They try and take advantage of the share price differential between exchanges or in the cash and futures market. Since the transactions are immediate, there is no risk.
Though the returns are lower, they have been decent in this downturn. The category average return has been 7.35 per cent, with the better funds returning over 9.5 per cent. In the last six months, they have returned 4.48 per cent. The big advantage: Though they are hybrid funds, the ones that invest over 65 per cent in equities are taxed, accordingly.
Entry load: Nil
Exit load: 0.5 to 0.75 per cent after three-six months
Short-term tax: 15 per cent
Long-term tax: Nil
Gold exchange-traded funds: As these funds mirror the performance of physical gold, they have been the star performers in the last one year. However, the gold market is highly volatile.
With yearly returns of 30.79 per cent, no one should be complaining. Even the half-yearly returns have been as impressive at 40.36 per cent. "But I wouldn't advise a person to invest the entire corpus in gold ETFs because of the high volatility," says Hemant Rustagi, director, WiseInvest, a mutual fund advisory firm.
Entry load: Nil
Exit load: Nil
Short-term capital gains: 33 per cent (for the highest income tax bracket)
Long-term capital gains: 11.33 per cent without indexation, 22.66 per cent with indexation
Physical gold: Another investment that allows immediate liquidity. However, remember that though banks sell gold coins, they do not buy it. It has to be sold to the jewellers. And they often give a lower price.
In such a case, it is better to purchase it directly from jeweller, who give a certificate and sell it back to them at the prevailing rates.
In case of jewellery, there is a making charge involved that might reduce the returns if you want to sell it urgently.
Tax (under three years): 33 per cent (for the highest income tax bracket)
Tax (over three years): 22.66 per cent with indexation
Fixed deposits (FDs): Bank fixed deposits is one option that offers highest safety of principal, but the only issue is that money has to be locked-in for some time. A six-month FD would fetch returns of 3.5 to 5 per cent. For higher time period, rates vary between 8-10 per cent a year.
The good part is that in spite of the lock-in, the bank allows you to break the fixed deposit before the stipulated time period. But the interest payout will be only for the period of investment. "Earlier banks used to charge 1 per cent as penalty, now most banks waive it off," said Gaurav Mashruwala, a certified financial planner.
Tax: 33 per cent (for the highest income tax bracket)
Financial advisors say that another way to save money is by investing directly with the fund house. This would save the entry load, a good 2.25 per cent in case of equity funds.