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!!!

Good News for Debt Market Investors

We all know that debt instruments like bonds and other deposits offer a fixed interest rate. But, recently there is a fresh development that is even better news. Read on to find out more about it.

Who is this news for?

This news if for the risk averse investor who selects NSC, PPF and other savings and debt instruments as his first investment choice. As you might already be aware, these instruments NSC, PPF are 100% safe investment havens and offer decent returns at literally 0 risk. Hence they are a preferred choice for investors.

What caused this news?

Till now, the returns on these investments have been the same for ages. When I started earning many years ago, the rate of returns on these instruments were hovering around the 8% mark and in spite of the many years that have gone by, the rates are still the same. They are pretty much considered fixed return instruments and their rate of returns do not change and most importantly investors do not have much choice when it comes to choosing these investments. But, this is all set to change.

What is this Good News?

The Rate of Returns on these instruments are no longer fixed. The rate of returns on these debt instruments will be pegged against a bench mark and the rates will be revised every year depending on what the benchmark is.
For Ex: the rate of returns on a 1 year post office deposit will be pegged against the 364 day Treasury Bill offered by the Govt. of India. The details are:

Saving Instrument	Current Rate of Returns	Proposed Rate of Returns	Benchmark Rate
1 Yr Time Deposit	6.25%	6.8%	364 Day T-Bill
5 Yr Time Deposit	7.5%	8%	5 Year Govt Securities
5 Yr Recurring Deposit	7.5%	8%	5 Year Govt Securities
5 Yr Senior Citizen Savings Scheme	9%	8.7%	5 Year Govt Securities
5 Yr NSC	8%	8%	5 Year Govt Securities
10 Yr NSC	N/A	8.4%	10 Year Govt Securities
PPF	8%	8.2%	10 Year Govt Securities

Is there any Bad News?

Well Yes, the only bad news I can think of is the fact that, the loans offered against such instruments will get costly because the rates offered by them are going up. Apart from this I cant think of any other bad news. For Ex: You can take loans against your PPF deposits. The new proposal states that, the rate of interest on the loans on PPF will be pegged at 2% greater than the rate that is offered on PPF Deposits.

All else considered, this is indeed a good news for all investors who want safety and stability on their investments.

Happy Investing!!!

Safe Investment Havens

At troubled times like these, safety of the investment is of prime concern to most investors across the country. When we check safety as a primary criterion, we may have to compromise on the return on investment (ROI)
Safe investments (Like the ones we are going to see in this article) would give you returns of around 8% per annum with a full 100% guarantee on the invested amount.
Even in such difficult times, I would suggest equities for investment because they would outpace the returns of all other asset classes always, considering the interests of the conservative investor is also important. This article is for the conservative investor for whom the motto “Safety First” is etched on stone and they would never compromise on that.

Let us have a look at some of these investment options and their strengths which would tempt us to choose them to park our funds.

1. Bank Fixed Deposits
2. Post Office Time Deposits
3. Kisan Vikas Patra
4. National Savings Certificate
5. Post Office – Monthly Income Scheme (POMIS)
6. Post Office – Recurring Deposits (PORD)
7. Public Provident Fund (PPF)
8. Senior Citizen Savings Scheme

Bank Fixed Deposits:

Bank FDs have been one of the most prominent saving instruments for the average Indian citizen. If you happen to ask a person who is of our father’s age (Assuming you are in your 20’s or 30’s) one of the first choices for saving money would be a Bank Fixed Deposit. These are very safe investments where the bank is bound to repay our money along with interest at maturity or even before maturity if you wish to close the account.

Positives:

1. 100% safe
2. Tenure ranging from one month to 5 years is available
3. Rate of Interest ranging from 5% to 9% (An extra 0.5% for senior citizens)
4. Tax benefits on investment upto Rs. 1 lac for 5 year tax saving deposits
5. No upper limit on investment

Negatives:
1. Interest earned on the deposit is fully taxable
2. Penalty charges may be levied if you wish to close your deposit prematurely (i.e., before the scheduled maturity date)

Post Office Time Deposits:

Post office time deposits are similar to Bank fixed deposits with one major difference. You open the deposit account in a post office instead of a bank.

Positives:
1. 100% safe
2. Tenure ranging from 1 to 5 years is available
3. No upper limit on investment
4. Rate of interest ranging from 6.25% to 7.5% (Compounded Quarterly)

Negatives:
1. Interest earned on the deposit is fully taxable
2. No Income Tax benefits

Kisan Vikas Patra
KVP is similar to the Post office Time Deposits. These are close ended deposit products launched by Indian Post office where our money would double in 8 years and 7 months. Assuming you invest 1 lac today in KVP, your money would be worth 2 lacs at the end of 8 years and 7 months.

Positives:
1. 100% safe
2. No upper limit on investment
3. Rate of interest 8.41% (Accumulated Interest is compounded yearly and paid on maturity along with our principal)

Negatives:
1. Interest earned on the deposit is fully taxable
2. No Income Tax benefits

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.

Positives:
1. 100% safe
2. No upper limit on investment
3. Rate of interest 8% (Compounded half yearly)
4. Tax benefits. Investments upto Rs. 1 lac are exempt from income tax under sec 80C
5. Investment tenure is 6 years

Negatives:
1. Interest earned on the deposit is fully taxable

Post Office Monthly Income Scheme (POMIS)

The POMIS is a scheme launched by the Indian post office where an investor can invest a lumpsum amount on which the interest would be paid out monthly. This is used as a regular source of income for many senior citizens.

Positives:
1. 100% safe
2. Rate of interest is 8% and is paid monthly
3. Investment tenure is 6 years

Negatives:
1. Interest earned is fully taxable
2. Upper limit on investment is Rs. 4.5 lacs for individual accounts and Rs. 9 lacs for joint accounts

Post Office Recurring Deposit (PORD)

The PORD is a recurring deposit scheme that is launched by the Indian post office. In this scheme, an investor can deposit a small sum of money on a monthly basis and the amount would be paid on maturity as a lump sum along with interest.

Positives:
1. 100% safe
2. Rate of interest is 7.5% (Compounded Quarterly)
3. No upper limit on investment
4. Tenure is 5 years

Negatives:
1. Interest earned is fully taxable

Public Provident Fund (PPF)

PPF is similar to the normal Provident Fund 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.

Positives:
1. 100% safe
2. Rate of Interest is 8% (Compounded yearly)
3. Investment tenure is 15 years
4. Tax benefits under sec 80C for investments upto Rs. 70,000/-
5. Returns on investment are tax free

Negatives:
1. One can invest only Rs. 70,000/- per year
2. Must invest atleast Rs. 500/- every year to keep the account active.

Senior Citizens Saving Scheme

Senior Citizens savings scheme is a special deposit scheme meant for senior citizens (Individuals who are over 60 years of age) You can invest in this scheme through either post offices or through nationalized banks like SBI.

Positives:
1. 100% safe
2. Rate of Interest is 9% per annum (compounded quarterly)
3. Tax benefits on investments upto Rs. 1 lac under sec 80C
4. Investment tenure is 5 years

Negatives:
1. Upper limit on investment is Rs. 15 lacs
2. Interest earned on investment is fully taxable.

Recommendation:
As the options discussed above are all 100% safe they are a must have in ones investment portfolio. Based on your age, the share of these investments in your portfolio would vary. As a rule of the thumb, you must have a % of your investments equaling your age in these instruments. Assuming you are 30 years old, 30% of your investments should be in such options and the remaining 70% in other options like equities, real estate, gold etc.

Happy Investing!!!

Balanced Portfolio

A Balanced Portfolio is one that is designed to take care of capital preservation to an extent and at the same time to generate decent returns when compared to a Conservative Portfolio. A conservative portfolio can give a return of around 10% per annum and it may go up or down based on the returns generated by the 25% equity component. Otherwise our capital that we invested in it would remain almost intact. In a Balanced Portfolio we would invest around 50% in equities and the remaining 50% in safe investments like in the conservative portfolio.

A Balanced portfolio is ideal for people who are ready to take a medium risk by investing in stock market and at the same don't want to expose themselves to too much risk.

In a Balanced portfolio since half of our money is invested in safe instruments, even if the markets crash atleast half of our money would be safe. The equity exposure would give us decent total returns on our investment.

Pls refer to the Conservative Portfolio to find out the instruments that can be used for the safe investment part.
Pls refer to the Aggressive Portfolio to find out the instruments that can be used for the equity investment part.

A Sample Balanced Portfolio:

Direct Share investment - 10% -> Rs. 10,000/-

This amount can be directly invested in Large Cap stocks that have been growing at a consistent pace over the year. Pls check the article on criteria to be considered before choosing stocks so that you can choose good stocks for your portfolio.

Do not invest the whole amount at one shot. Buy in a phased manner. Say for e.g., buy shares worth Rs. 5,000 every 6 months

A Systematic Investment Plan (SIP) in a Diversified Equity Mutual fund for Rs. 2000/- per month which is Rs. 24,000/- per annum
A SIP in an ELSS Mutual fund for Rs. 1500/- per month which is Rs. 18,000/- per annum

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 market is down.

Gold - 10% -> Rs, 10,000/-

Bank Fixed Deposit - 20% - Rs. 20,000/-
PPF - 20% - Rs. 20,000/

Net amount invested = Rs. 1,02,000/-

What Returns can you Expect out of this portfolio?

As we know, PPF & 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. Lets say the Shares gave us a returns of 25% this year and the Diversified Equity fund a return of 30% and our ELSS fund a return of 23%.

Value of Shares at the end of one year - Rs. 12,500/-
Diversified Equity MF Value at the end of one year - Rs. 31,200/-
ELSS MF value at the end of one year - Rs. 22,140/-

Value of Gold at the end of one year - Rs. 11,500/-

Amount in Bank FD at the end of one year - Rs. 22,000/-
Amount in PPF at the end of one year - Rs. 21,600/-

Net portfolio worth at the end of one year = 1,20,940/-

Returns on Investment = 18.5%

Happy Investing...

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...