Invest Wisely in Bank Fixed Deposits

Investing in Bank Fixed Deposits is something that has been covered in this blog time and again. But, the purpose of this article is the direct result of a meeting I had with a friend during my most recent India Trip last week. To give you a hint – This article is about something we need to be very careful about while opening Bank Fixed Deposits.

What Happened in India?

I met a long-time friend just outside a Bank near my house and we went off to the nearby coffee shop for some chit chat. He had a receipt in his hand which looked like Fixed Deposit Receipts issued by the bank. Coincidentally I had just put up some Fixed Deposit in the same bank and the topic of our discussion touched upon the rate of interest. He had deposited Rs. 1,00,000/- at 7.25% per annum rate of interest for a period of 9 months and I had done Rs. 50,000/- for 1 year at the same rate.

I said, how come for two different tenures, the rate of interest is the same? Usually longer tenures have a higher interest rate and so we both went back to the Bank and asked the guy (Teller) at the counter for the Interest Rates list. He hesitated for just a quick second and then gave it to us.

The rates card looked as follows:

6 month 17 days to 9 month 15 days – 7.25% p.a
9 month 16 days – 8% p.a
9 month 17 days to 1 year – 7.25%

Both our initial reaction was what the ****!!!

Usually customers go to the bank with a predetermined duration in mind and the most common durations for the deposits is 6 months, 9 months, 1 year and so on. In this case my friend chose 9 months and I had chosen 1 year. The problem here is – neither of us cared to look at the rates card and if we had, we would’ve got an additional 0.75% rate of interest on our deposits.

What Went Wrong Here?

This situation can be attributed to 3 reasons which are as follows:

Reason 1: Neither of us cared to look at the interest rates card that the bank offered for various deposit periods.
Reason 2: The Interest Rate Card was not displayed prominently in the Bank. Though it was stuck to a pillar in some corner of the bank, it wasn’t in a place where every customer could easily see it.
Reason 3: The Teller did not suggest we look at the various deposit periods and choose the one that would best suit us.

In this case, the biggest blame lies on us because, it is our money and we should’ve been more prudent and wise in our decisions. From a banks perspective, the lesser interest they pay us, the better it is for them. From a teller’s perspective, he is only set targets on how much deposits he needs to mobilize and not the rate of interest. So, both reasons 2 & 3 are ethically Mistakes but Legally Not.

Remember the saying “If you don’t think about what is good for you, Nobody else will” This is totally apt with respect to all Money Related Transactions anywhere in the world.

My friend needed money for his son’s school fee next April, so he could’ve afforded to choose the 9 month 16 days scheme instead of the 9 month scheme he selected thereby getting an additional 0.75%.

He is going to get Rs. 5,437/- as Interest on his 1 lakh deposit at the end of 9 months while he could have gotten Rs. 6,333/- (Rs. 896/- more) for the same deposit amount if the deposit duration was an additional 16 days.

Lesson Learnt:

Always ask for the Rate of Interest offered by the bank for various deposit durations and choose what is best for you. Even if the bank has not displayed it prominently in their premises or if the Teller doesn’t offer you one when you inquire about Fixed deposits, you can DEMAND to see it before you invest your hard earned money.

Nobody and I mean NOBODY can deny you your right to take a look at the rate of interest offered by the bank for various deposit durations before you take your investment decision.

Alternately, you can check out the website of your respective banks and check out the interest rate beforehand and decide on the tenure before you actually visit the bank.

So, be cautious and make the best investment decision.

Verdict:

The whole idea of Fixed Income Investments is Safety of the money deposited & Guaranteed Returns. If the same amount will earn us a higher rate of interest, then we would rather choose that instead of something else.
After my experience as above, I did some digging and found that almost all banks had some sort of difference in rate of interest with some rare date combination like 444 days or 9 months and 16 days or something on those lines getting higher rate of interest than the regular 1 year or 2 year deposit durations. So, please be cautious and careful while making fixed deposit investments.

Happy Investing!!!

Is This The Right Time To Invest In Debt Instruments?

Debt Instruments have been one of the staple investment options for Indians over the past decade. Though the number of people and the amount of investments going into the Stock Markets in India has gone up consistently over the past few years, exposure to Debt Instruments has always been steady. At the end of the day "Safety of the Invested Money" is one of the most important requirements for us Indians per say when we make any sort of investment.

In this post, we are going to take a look at two important reasons that make these Debt or Fixed Income Instruments very attractive.

Reason No. 1 - Carnage in the Indian Stock Markets

This is probably the most obvious reason for this suggestion. The Indian Markets have been very volatile over the past few months and the past few days have been especially worse. The Market has gone down by an average of around 100 points or more on a daily basis. This week alone it has gone down by around 400+ points. In this Volatility, Investing in the Stock Markets is a risky affiar and hence, going for Fixed Income Instruments like Fixed Deposits, Bonds etc would be a wise decision.

Reason No. 2 - Rising Interest Rates in India

The Interest Rate Market in India, for Fixed Income Instruments like Bonds & Deposits is one of the highest in the World. A Majority of the fixed income investment options available in India have hiked their rate of interest making these products all the more attractive for Investors. Look at the table below: This is the Rate of Interest Comparison of some of the Most Prominent Fixed Income Investment Options available in India over the past couple of years.

Investment Opption	Rate of Interest in 2011	Rate of Interest now in 2012
5 year NSC	8.4%	8.6%
10 year NSC	8.7%	8.9%
PPF	8.6%	8.8%
5 year SCSS	9%	9.3%
5 year RD's	8.2%	8.5%
1 year FD's	8%	8.5%

Note: Rate of Interest for RD's & FD's is the Industry Average. Private Banks are offering an average of around 0.5% to 1% than their Public Sector counterparts.

In the above table:

NSC - National Savings Certificate
PPF - Public Provident Fund
SCSS - Senior Citizens Savings Scheme
RD - Recurring Deposit
FD - Fixed Deposit

As you can see, Debt or Fixed Income Instruments are giving us absolutely awesome returns and the best part is, these returns are guaranteed. So, at the current market scenario, I dont think we can get any investment that would be better than this...

Some Last Words:

If you think that this 8% or 9% Rate of Interest is less, just remember that India has one of the highest rate of Interests on Debt Instruments. Do you know what is the average rate of interest on Savings Accounts in Countries like USA or Singapore? It is less than 0.5% per annum. What about Fixed Deposits? It is in the 2% to 3% range. Now, go back and re-think if the Rate of Interest we earn on our deposits is less...

On the other side, Loans in India are one of the costliest. In Developed Nations, loans are atleast 50% cheaper than in India. Anyways, this isnt the topic of our discussion.

So, Happy Investing in Debt Instruments!!!

Conservative Portfolio

A conservative portfolio is one in which our main aim is capital protection. The gains may be small but the capital we invested would not erode in value. That is the reason why 75% or even more of the portfolio is invested in safe instruments. Only the remaining is invested in moderate risk to high risk instruments.

Let us have a look at some of the instruments that we can consider as safe investments:

1. Bank Fixed Deposits
a. Very Safe
b. Highly Liquid
c. Gives you a decent rate of returns (Upto 10% these days per year)

2. PPF - Public Provident Fund
a. Very Safe
b. Useful for long term investment because your money is locked in for 15 years
c. Gives you a decent rate of returns of 8% per annum which is compounded every year

3. NSC - National Savings Certificate
a. Very Safe
b. Useful for medium term investment because your money is locked in for 6 years
c. Gives you a decent rate of returns of 8% per annum which is compounded every half year

To know more about the Bank fixed deposits or PPF or NSC check out the article on Investing to Save Tax.

4. Gold
a. Very safe (You will possess the gold so nobody can deny money if you want to sell it)
b. Moderately Liquid - You need to find a buyer to convert your gold to cash

The specialty of Gold is the fact that, it may give you returns of as high as 20% per year but this is not a guaranteed return. It may go up or even go down. The only advantage of gold is that it is a precious metal which is under demand always and you can expect the prices to go up constantly. Since it has a small risk attached with it, make sure that your exposure to gold does not exceed 10% of your portfolio's net worth.

A Sample Conservative Portfolio:

This portfolio is for somebody who can invest Rs. 1 lac every year. You can adjust the amounts according to the amount you can invest.

PPF - 25% -> Rs. 25,000/- per year
Bank Fixed Deposits - 20% -> Rs. 20,000/- per year
NSC - 20% -> Rs. 20,000/- per year
Gold - 10% -> Rs. 10,000/- per year

Open a Systematic Investment Plan with a Diversified Equity fund or well managed ELSS fund for Rs. 2,000/- every month. Investing the SIP way is the best way to invest in Mutual funds because they average out the cost of purchase because we keep buying even when the maket is down.

Equity SIP - 25% (2,000 pm * 12 -> Rs. 24,000/-)

Net Total - Rs. 99,000/-

Stay away from direct Equity exposure.

Reason: Equity investment requires a lot of planning and careful stock selection and most importantly it involves a lot of risk. You are wondering by now that I have suggested a SIP in a Equity oriented mutual fund. That is because, Mutual funds are managed by professional fund managers who have a lot of expertise and time to manage the fund. Since we are going with a conservative portfolio it is better we avoid direct stock investments.

What Returns can you Expect out of this portfolio?

As we know, NSC & PPF give us a return of 8% per annum and Banks give us returns of upto 10% per annum. We will assume that gold would give us a 15% return per annum and the Equity SIP gives us a nominal 20% returns per annum.

PPF Amount at the end of one year - Rs. 27,000/-
Bank FD Amount at the end of one year - Rs. 21,800/-
NSC Amount at the end of one year - Rs. 21,632/-
Gold Value at the end of one year - Rs. 11,500/-

Equity SIP Value at the end of one year - Rs. 28,800/-

Net Portfolio Worth - 1,10,732/-
Amount Invested - Rs. 99,000/-

Returns on Investment = 11.85%

Happy Investing...

Saving Income Tax through Investments

Every Indian who earns an income in India is entitled to pay tax on his income. As per the Indian tax laws we the tax payer is allowed to save his income tax by using the provisions under Sec 80C of the tax laws. To know more about the Indian Income tax laws and the options using which we can reduce our tax pls refer to this link. Income Tax

In this article we will be checking out some investment options that would help us save some cash for our future.

Why do we need to invest?

This is one big question that most of us have but we do not know the best answer. The most common answer is "To Save Income Tax".

Yeah that too is an answer but that is not the first of the reasons. There are a few other compelling reasons why we should invest.

1. Inflation - The Inflation rate of our country is currently at 11%. This means that anything you buy this year for Rs. 100 would be worth Rs. 111 next year. Next year our income would rise but so would our commitments. So if our money is not growing at least at the rate at which the inflation is going, then effectively the worth of our money is going down.
2. Future Income - Today we are in a good job and earning a decent income. After 20 or 30 years we would have to retire some time. After that we would not want to compromise on the life style we are used to. Nor would we want to be dependent on our children to support us. So what is the only option? We must save up some cash that we can use after our retirement. This is possible only by investment.
3. Financial Security - Financial security is something all of us would want to have. If anyone asks us what would make us feel financially secure what would we say? A bank balance of 10 lacs? Yeah that sounds nice. But how would we get such lump sum amounts? The answer is simple. If we start investing now, once our income earning days are over we would be able to sit on a pool of cash that would make us feel financially secure...
4. Saving Income Tax

I have intentionally placed Saving Income tax as the last option because, we must not invest just for the sake of saving tax. We must invest sincerely because we are the ones who is going to enjoy the fruits in future.

In my article on Income tax i have mentioned about 9 options that are available for us under Sec 80C to save tax. Out of these I am going to consider the investment options available. We would not be considering Life Insurance and Home loans because they are not investments but a protection and an asset for us. We will be looking at them one after the other in the increasing order of risk and also the increasing order of Returns.

Remember - "The Greater the Risk, Greater are the Returns" This doesn't mean that we must only in high risk instruments. Definitely not. We must have exposure to safe avenues of investment too because after all it is our hard earned money and we do not want it to go waste. We must maintain a good balance between risky investments and safe investments so that our principal is intact and at the same time our money must grow and beat at least the Inflation rate.


1. Provident Fund

All of us know what Provident Fund is. This is a portion of our salary that our employer deducts every month. This money is remitted to the government of India's PF trust. This money is used by our government for its cash needs. Once we retire or close our PF account, the money that has accumulated against our name would be given back to us. The money in our PF account grows at the rate of 8.5% per annum compounded every year.

Safety = Very high because backed by the government
Returns on Investment = Average - Our Inflation is 11% and the returns on PF is only 8.5%

Investment Strong points:
a. Extremely Safe
b. A small amount every month can help us make up a good corpus over the long run.

Downside:
a. Only average returns.

Note: Ever wondered why the government of India has made PF mandatory for all employers? Even the government wants us to save some money for our future. The best way is to make it mandatory at the source which gives us the income. We should be thankful to our government for doing at least some good things for us :-)

2. Public Provident Fund

PPF is similar to PF with the only difference being, anyone can open a PPF account by visiting the nearest State Bank of India branch. PPF is also managed by the government of India. Once we open a PPF account we can deposit cash in our PPF account anytime. There is one restriction here. We must deposit at least Rs. 500/- every year to keep our PPF account active. The maximum amount we can remit in our PPF account every year is Rs. 70,000/- Our PPF account remains active for 15 years and if we want we can extend it by a further 5 years. We cannot encash the entire amount in our account before the tenure of 15 years. Of course we can do partial withdrawals from our account but we cannot take out the entire corpus.

Safety = Very high because backed by the government
Returns on Investment = Average - Our Inflation is 11% and the returns on PPF is only 8%

Investment Strong points:
a. Extremely Safe
b. A decent amount deposited every year can help us make up a good corpus over the long run.

Downside:
a. Only average returns.
b. Very long lock in period. We cannot take out our cash before 15 years
c. We need to deposit at least Rs. 500/- every year to keep the account active.

3. National Savings Certificate

NSC certificates are certificates of deposits issued by the government of India. Any Indian can deposit cash in NSC. This money would be used by the government for its cash needs. NSC gives us a return of 8% per annum compounded every half year and we can get our amount inclusive of the interest at the end of 6 years. 6 years is the lock in period on NSC certificates. Since these certificates are issued by our government they are extremely safe.

Safety = Very high because backed by the government
Returns on Investment = Average - Our Inflation is 11% and the returns on NSC is only 8%

Investment Strong points:
a. Extremely Safe
b. A decent amount deposited every year can help us make up a good corpus over the long run.

Downside:
a. Only average returns.
b. Long lock in period. We cannot take out our cash before 6 years
c. The Interest earned on NSC is taxable

4. Bank 5 year Fixed Deposits

The latest addition to the tax saving investment options is the Bank 5 year fixed deposit. We can deposit our cash in this special scheme of fixed deposits in any bank. Most banks give us returns as high as 10% for these deposits. The money we deposit is locked in with the bank for 5 years after which we can take back our money. We can opt for periodic interest payments or we can get the interest along with the principal at the end of 5 years.

Safety = High because backed by the RBI
Returns on Investment = Average - Our Inflation is 11% and the returns on FD's is only 9% or 10% max

Investment Strong points:
a. Very Safe
b. A decent amount deposited every year can help us make up a good corpus over the long run.

Downside:
a. Only average returns.
b. Long lock in period. We cannot take out our cash before 5 years
c. The Interest earned on Bank FD's is taxable if it is more than Rs. 10,000/- per annum.


5. Equity Linked Savings Scheme (ELSS)

ELSS mutual funds are a category of Mutual funds that are exempt from Income tax. To know more about Mutual funds Click Here

ELSS mutual funds are special funds that invest predominantly in Large cap stocks (Companies that are very large with exceedingly high capability of profit making, that have been successful for a number of years) ELSS funds have a lock in period of 3 years after which we can take our money if we want. Since the money we invest is invested in the Share market, the returns are not constant. In years in which our market performs well we can expect exceptional returns but at the same time it carries a risk. If our markets perform poorly we may incur losses. But over the years, the Indian share market has been able to give a returns of at least 15-20% year on year.

Safety = Low, because the money is linked to the share market.
Returns on Investment = Very high - If the share market goes up, our returns may exceed 20%. In the past 2 years until Jan 2008, our markets have dished out returns as high as 50%

Invest Strong Points:
a. High returns
b. A small amount investment every month can help us accumulate wealth over the years.
c. Short lock in period. ELSS is the only investment option that has a lock in period of only 3 years.
d. Returns on ELSS are tax free. Both Dividends and the maturity amount.

Downside:
a. High risk because it is linked to the stock market

The most important point:

This is the most important point of this article. "Starting Early"

Starting Early means, starting investing at a young age. Assuming two friends A & B start investing. A is 25 years old and invests Rs. 50,000/- every year for the next 20 years. B is 35 years old and invests Rs. 1 lac every year for the next 20 years. Who do you think will have more cash by the time they are 60 years old?

If you said B then you are wrong. A would have more money because he started early. His investments were able to earn an income on themselves for 35 years which was 10 years more than B's investments.

Assuming you can invest Rs. 1 lac every year for the next 25 years in an instrument that gives you a returns of 10% per annum. By delaying your investment by one year your corpus would fall short by Rs. 3.5 lacs at the end of 25 years. That is the power of compounding. The interest you earn this year would earn interest for you next year. So Start Early :)

Happy Investing...