Category: Investments

Over the past few days I’ve received a few comments whose central theme is safety of returns while providing moderate returns.

I think the bad performance of the stock market over the past few years has made people search for instruments where return of capital is more important than return on capital, and these questions are a result of that mindset.

In this post I’ll be listing out 10 instruments that I think are quite safe for investing along with their tenure, expected return, tax applicability and other notes. If you think something else should be on this list, please leave a comment.

S.No.	Investment	Tenure	Expected Return	Tax Applicability	Comments
1	Bank Fixed Deposits	Few days to several years	Usually over 8%	Taxable at the investor’s slab	Bank failures are rare in India so bank fixed deposits are a very safe way to invest your money.You know the rates up front so there is no uncertainty there.Taxes can eat into your returns though, especially if you are in the high tax bracket, but even then a FD that compounds quarterly and is done for a long maturity will yield well.Here is a link to a post which has the list of some of the best bank fixed deposits that are available in India right now.
 2	Tax Saver Bank Fixed Deposits	5 years or more	 Usually over 8.5%	The amount that you invest in tax saver FD is deductible from your taxable income up to a limit of Rs. 1 lakh under 80C. The interest income itself is taxable.	Like the bank fixed deposit, this is also a very safe and certain investment.The drawback is that money is locked in for at least 5 years, and the positive is that you get some tax benefit to juice up your return.Here is a link to some of the best tax saver fixed deposits available in India right now.
 3	Public Provident Fund	 15 years	8.8%	The amount you invest is eligible for 80C deductions and the returns are tax free too.	This is also a very safe investment, and the returns are spectacular, specially for someone in the 30% tax bracket.If you don’t mind the 15 year wait period then no other fixed income investment can match the PPF return for the safety it offers.
 4	NSC IX Issue	 10 years	8.9%	Interest income is taxable.	This is another safe investment with decent returns.Here is a post with this and other post office scheme details.
5	Senior Citizens Savings Scheme	 5 years	9.3%	Interest is taxable, investment amount is eligible for 80C deduction.	A lot of readers have commented here over the years about how useful the SCSS is along with the monthly income scheme of the post office for their parents, and relatives and this is a good option as well.Here is a link to an image that has the interest rates for this and comparison with other similar instruments.
 6	Monthly Income Scheme	5 years	8.5%	Interest income is taxable	This is useful if you are looking for an instrument that gives you a monthly income.Here is link to a post about MIS.
 7	Tax Free Bonds	They trade on the stock exchange so you can buy or sell any time.	Usually upwards of 8%	Income is tax free	I would say that these bonds aren’t as safe as a bank deposit or a post office deposit but they can still be categorized as fairly secure instruments.If you buy these bonds from the stock market right now, they are trading at higher than their face value so your effective yield will be less but then there is always a chance to make capital gains if interest rates come down.Here is a good link on the NSE website that has quotes of all these bonds.Â
 8	Fixed Maturity Plans	1 year or more	Not fixed but usually comparable to fixed deposits	This is tax efficient when compared with FDs. Read more for details.	Although these are fixed income instruments, there is absolutely no guarantee or indication of what the returns will be like.To that extent, they are very different from the other instruments mentioned in this list.Even then, they are specially attractive to people in the higher tax bracket due to their eventual FD like returns and tax advantage.Read more about FMPs here.
9	Debt mutual funds	Varying maturities and can be bought and sold anytime.	Not fixed.	Tax on capital gains and dividends.	These are like FMPs in the sense that the returns are not fixed, so they are not meant for you if you can’t handle the uncertainty.Their popularity stems from the fact that they are flexible to buy and sell and have given decent returns in the past.
10	 Corporate NCDs	Varying maturities	 Higher than fixed deposits.	Interest is charged according to your slab and capital gains are also applicable.	These are higher risk compared with the other instruments mentioned in this list, especially if you invest in a  NCD of a company which doesn’t have robust finances.The higher risk means that their return is higher as well and they can be used to juice up your fixed income portfolio but you need to be careful while buying them.This post about 6 things to keep in mind while investing in company NCDs is a good way to get started on this topic.
11	Savings Account	No Maturity	4 – 7%	Interest is tax free up to Rs. 10,000 and then charged according to your slab.	A reasonable place to keep your short term funds, but if you have a lot of money in a savings account then you need to consider a FD or some other instrument that can yield higher.

All these options are widely known and based on what you want to do and what the rest of your portfolio looks like, you can pick and choose one or more for safety and reasonable returns.

Finally, would you like to add anything to this list?

Update: Added Savings Account per Ankur’s suggestion, please excuse the inaccurate title.

UTI ULIP is the only ULIP run by a mutual fund company in India, which is interesting because for insurance cover they pay LIC and then get you under a group insurance cover from LIC.

They also say it is the lowest cost ULIP, and while I’m not sure if this is the lowest cost or not, the costs do seem to be lower than most other ULIPs.

Like any ULIP plan, this has got an insurance component and an investment component, and as far as maturity goes, you can opt for the 10 year plan or the 15 year plan.

This also seems to be structured differently from other plans, and it took me quite a while to figure out the terminology used, and let’s start with the harder part first, which is the insurance component.

UTI ULIP Insurance Component

The plan has two terms of either 10 years or 15 years and you have to select either of these two terms first.

Then you have to select what they’re calling a “Target Amount”. The target amount is the money that you will pay UTI over the course of this policy.

So, if you choose a target amount of Rs. 15 lakhs for a 10 year policy, you will pay them a premium of Rs. 1.5 lakhs every year.

This target amount becomes your life insurance cover, and there are two types of life insurance covers that you can opt for.

• Declining Term Insurance
• Fixed Life Insurance

Declining Term Insurance

This is the first time I’ve heard of a declining term insurance and a little Googling reveals that this is a type of insurance that people take out to cover mortgage payments whose outstanding balance reduces as time goes by. So, you need lesser and lesser insurance every year to cover that payment.

Now, let’s see how this works or at least my understanding of how this works.

In our example, since your target amount is Rs. 15 lakhs, that’s your insurance cover and you pay Rs. 1.5 lakhs every year for 10 years.

Your insurance amount is what you haven’t paid to them yet. So, if you paid two years worth of installments which equal Rs. 3 lakhs then your insurance cover is Rs. 12 lakhs.

If you have done a SIP with them where you pay monthly installments; to calculate the unpaid amount they say that if you have paid 15 installments then they will consider that you have paid two years worth of installments which is obviously unfair to you.

Nothing is payable on death within 6 months of buying the policy.

You only get half of what’s due if death occurs between 6 and 12 months of taking the policy.

This would have made some sense if the premium charged in this case were less than the premium for fixed cover but that’s not the case so either this doesn’t make any sense at all or I have not understood this correctly. If you think I haven’t understood this correctly then I’ll much appreciate if you leave a comment explaining it the right way.

I’ve based what I say on their document and this is the relevant extract on page 23.

Under Declining Term Insurance Cover: Life insurance cover is to the extent of the unpaid but not due amount of the chosen target amount as applicable for the yearly instalment payment. No life insurance cover is payable in case of death less than 6 months from the commencement of membership. For 6 months and above but less than 1 year the life insurance cover is 50% of the target amount unpaid but not due. For example for target amount of `120,000/ – under the 10 year plan, the yearly instalment due is `12,000/ – and the unitholder has died after paying only `7000/ – (7 monthly instalments) the Life Insurance Cover payable is 50% of `120,000/ – less `12,000/ – i.e. `54,000/ – and not `56,500/ – (50% of `120000/ – less `7000/-). For 1 year and above 100% of the target amount unpaid but not due is payable. For example under the 10 year Plan for a target amount of `1,20,000/ – in case a unitholder dies after paying 15 instalments (`15000/-) the life insurance cover payable is `1,20,000/ – less `24,000/ – i.e. `96000/-).
Under Fixed Term Insurance Cover: No life insurance cover is payable in case of death less than 6 months from the commencement of membership. For 6 months and above but less than 1 year the life insurance cover is 50% of the target amount. For 1 year and above 100% of the target amount is payable.

Fixed Term Cover

The fixed term cover works like the regular term plan where your target amount becomes your insurance premium and you get that paid upon death.

The conditions that exist for the 6 months and one year period that is no insurance money to be paid out if death is within six months of taking cover and only half of the insurance to be paid out if death is between 6 months and a year is also applicable in this case.

The table for rates shows that for a 31 year old the premium is Rs. 1.30 per Rs. 1,000 sum assured and that rate looks quite less to me because you need to pay that for only 7 years and a Rs. 5 lakh cover based on that comes out to just Rs. 650 per year and that’s even lesser than comparable term plans. I’m not certain what’s going on in here as well.

Covered under Section 80C

This plan is covered under the Section 80C tax saving scheme so at least till the time DTC is not implemented you will benefit from the tax benefits.. There have been several changes in DTC and it won’t be surprising if the final draft allows some sort of tax saving schemes but at this point it is better to assume that they won’t allow any tax saving schemes since they have never said that they will do that anyway.

UTI ULIP Investment Component

The investment part of this ULIP will invest in a debt oriented scheme which can invest up to a maximum of 40% in equity products.

This is a reasonably big fund with Rs. 2,322 crores under management and this fund has done quite well over the years and Business Line had an invest recommendation in it last year. The fund page shows that it has returned 10.87% since inception, 3.88% in 2011-12, 8.81% in 2010-11 and 35.87% in 2009-10, which are fairly good numbers. The plan doesn’t pay out any dividend as they re-invest the amount back in the fund.

Maturity Bonus

There is a maturity bonus where you get 5% of the target amount on the maturity of a 10 year plan, and 7.5% of the target amount on the maturity of a 15 year plan.

Conclusion

Of all the ULIPs I’ve reviewed here, this one seems the best because of the low cost and good fund performance. However it was a bit confusing to go through all the terminology used and I don’t feel confident that I’ve understood everything correctly, so if I were to buy this I would first seek out someone who has already bought this fund and ask some questions or someone who is familiar with what it is that makes this fund low cost and still profitable enough for UTI to run it.

This post was from the Suggest a Topic page.

Anusha Shashidhar had this question on the Suggest a Topic page the other day, and I think the tax bracket does make a difference in what products you choose because some of the things I wrote in my earlier post on investments like FMPs and tax free bonds will not be so attractive to someone in the lower tax bracket because they can use other products that are easier to set up (bank FD or RD) and don’t have any uncertainty in them either.

I think the following three product categories are worth looking at for beginners who aren’t liable to pay a lot of tax.

1. ELSS Funds: You can still look at ELSS funds this year for your 80C deductions and since you are only at the beginning of your career you have a lot of time on your hands that reduce the risk of equities somewhat. That makes me think that ELSS funds should be in your list of options.

2. Public Provident Fund: Starting with Jitendra Solanki, many people recommended PPF, which is something that I thought of including earlier but the 15 year lock in made me turn away from it. But if you are okay with the 15 year lock in period, then this is a great option as well, especially considering the tax free at maturity aspect of it. Business Line has a great article on how to invest in a PPF.

3. Plain old bank Recurring Deposit or Fixed Deposit: I shared Ramesh’s comment on OneMint’s Facebook wall earlier about a recurring deposit, and I’ll paste it here as well because I think there is a lot of merit in this line of thinking.

Fixed Deposit rates are showing a tendency to decrease rates now. SBI has already reduced by .25%. the same is true for RDs

I think it is the best time to invest for long term say 5 years before rates fall. And if you donot have surplus cash, you can always reserve your berth by investing in RDs for 5 years thus insuring your higher interest rates above 10% for next 5 years even if rates fall below 8%

I think this makes sense and Hemant has shown through detailed calculation that due to the benefit of compounding a fixed deposit at SBI yields quite good for the long term.

I’d also like to say that for people who are in the 10% bracket, sometimes it may not make sense to try to reduce your tax liability to zero because every instrument that reduces tax liability locks in your money and sometimes it is just better to pay the little tax you owe and have the freedom to use your money the way you want.

Finally, my apologies to Anusha and all the others who I’ve had to disappoint when they have asked for personal recommendations, I believe I have a good reason to say no, and if you have the time here is explanation for that.

Rakesh had a comment on what parameters should be checked before investing in a company’s fixed deposit, and when investing in fixed income there are two big things that you should keep in mind, and I’m going to talk about them first before getting down to specific parameters in a subsequent post.

Investing too much money in just one instrument brings risk without reward

Unlike equity, there is no disproportionate reward for concentrating all your fixed income investments in one instrument.

What this means is that if you had Rs. 1 lakh today, and you invested all of that in a stock with the hopes that the stock triples in a year you could go broke but you could also get rich because there is no limit to how high a stock can go.

But the same thing doesn’t apply to fixed deposits. If a smaller, riskier company is offering you 13% per year, and a bigger more stable company is offering you 10%, when you put all your money at 13%, your upside is just that 3% extra and your potential downside is simply too much because if the company goes bust then you stand to lose not only the extra interest but the principal as well.

I first came across this idea in 2009 when GM defaulted and a lot of its bondholders who had invested their life savings in GM bonds were left holding worthless paper.

I think this is a very important thing to keep in mind while investing in any fixed income instrument whether a company fixed deposit or otherwise.

You don’t know what you don’t know

Manappuram is one company that recently came out with NCDs and their stock along with Muthoot’s stock (which also issued NCDs) recently tumbled when news broke out that RBI was putting some restrictions on gold loans.

This news itself doesn’t threaten the NCDs issued by these companies but it’s impossible for a retail investor to know about these kind of things before they happen and take precautionary measure. There are simply far too many things that you don’t know and only when the event occurs you realize that such a risk even existed.

This is just one example, but this can happen to any company, and just last week news broke out that TV-18’s losses widened which is another company that issued NCDs recently.  While that was not as out of the blue as the RBI announcement, I think a lot of retail investors would have been surprised by it.

The two things I wrote about above are nothing new and I’ve written about them earlier as well in different contexts but if you think about them specifically with respect to investing in company fixed deposits, the big lesson to me is that you should always be humble about what you don’t know and appreciate that there is a big risk lurking somewhere and the best way to deal with that risk is to play it safe and spread your money around so that if something does go wrong it doesn’t wipe you off completely for what will be a few extra percentage points of interest.

In a following post I will write about the specific parameters that can help you build a negative list of NCDs that you shouldn’t invest in.

In part 1 of this series I wrote about the evolution of an investor to either a trader or a long term investor, and said that I favor long term investing to short term trading.

Then in the second part I wrote about the implicit assumption that a long term investor makes which is over a very long period of time the market will move upwards, and then also spoke about the nature of a share or stock. That nature I said was that a stock is a representation of the earnings of a company, and looking at it that way helps you stomach the volatility that exists in the market and deal with the daily ups and downs.

In the third part I wrote about regular investing, calibrating those investments and three big ideas that drive that type of investment. First one was my expectation that markets will edge higher over a time period of 3 – 5 years, second one was that markets don’t move in a linear fashion and a lot of the gains that have come in the past have come from small time periods that have surprised a lot of people so you don’t want to get out of markets completely, and finally I said that while timing is not be possible, you can vary how much money you put in the market and take advantage of falls.

I ended that post saying that I’ll deal with what are some of the instruments that you can use to execute this strategy, and that’s what I’m going to write about in this post.

ELSS Tax Saving Mutual Fund

If you want to invest in equities then ELSS funds are a great way to get started. They are one of the best options in the 80C limit since they have the lowest lock in period, and by investing the equity portion of your portfolio in ELSS, you ensure that you get some tax benefit right away which can be pretty significant if you are in the 30% bracket and the advent of some great tax free listed bonds also means that even if you don’t invest in bonds with 80C tax benefits you can still get good yields so you can keep 80C for equities.

Here is a list of good ELSS tax saving mutual funds that I updated late last year and this gives some good options that you can select one or two from.

I think ELSS funds should be on top of your list if you’re looking to get started with investing in shares.

Balanced Mutual Funds

Balanced funds may appear an odd selection when you first think about them because most of them invest about 35% of their assets in debt products, but past performance has shown that balanced funds have given returns comparable to good diversified equity funds, and that stems from the fact that the debt portion of it protects you from the sharp downturns that Indian investors have had to face many times during the last two decades, and there’s hardly any reason why that would stop from happening in the future.

Here is a list of some good balanced funds that you can choose from.

Good Diversified Funds

Hemant has a great article on some of the best diversified funds with some great comments that can be used to select a couple of diversified mutual funds to add to the balanced funds in the list above.

Nifty Index Funds

Internationally, index funds have done a lot better than active funds, I believe this is not true for India, and I’ve highlighted the reasons in this post (also read instructive disagreeing comments from Nitin).

Having said that, I feel if you are going to construct an equity portfolio, at least a small part of that should be a low cost index fund based on a large cap index like the Nifty or Sensex. I say that because costs eat into returns and index funds are lower cost (thought not as low as American funds) when compared with active funds, and have also performed decently in the past and give you the peace of mind that the fund manager won’t be screwing around with your money. The reason to stick to the big indices is that the Indian market is not very deep and volatility becomes quite high when you start moving towards the smaller caps.

These are some options from which you can consider choosing from, and as to the question of how much money you should invest – I think a little less than you are comfortable with is a good way to start.

I say that because it is hard for people to come to terms with how violently and quickly the market can fall, and how difficult it is to not panic and sell when you own funds that have gone down 15% or 20% in a month or two. Getting into the market with lower amounts will ensure that you’re able to deal with this volatility and get a grasp on how you feel about the market and feel more confident going in with bigger sums later on.

If you’re starting off then it is likely that you are in your twenties and still have a good 30 – 40 years of investing ahead of you, don’t rush to put all in and then later find out that you weren’t ready to risk that much money. More than losing the money, it will turn you away from the market completely and that means you lose out on what is potentially a great opportunity to steadily grow your money in years to come.

This is the last post of this series, and I must admit this was a lot harder than I thought it will be and took a lot longer than I thought it would take, so if you found it useful please do forward the links to your friends, and as always, all comments are welcome!

 

• Part 1: How should beginners approach investing in the stock market?
• Part 2: How should beginners approach investing in the stock market?
• Part 3: How should beginners approach investing in the stock market?
• Part 4: How should beginners approach investing in the stock market?

The Goldman Sachs Nifty Junior BeES is an index ETF that aims to track the CNX Nifty Junior Index.

The CNX Nifty Junior Index is an index that comprises of the 50 most liquid stocks after the Nifty, and as a result is a mid cap index.

The GS Nifty Junior BeES is an index ETF and you normally associate low costs with index ETFs because there is no active management involved, however at a 1% annualized expense ratio – this ETF is not low cost and I’m not sure why they charge 1% because they charge just half of that for their Nifty ETF and this product is no different from that.

With just over Rs. 85 crores in assets, this fund is not very big either and given that it’s been around since 2003, it shows that it hasn’t been able to attract the attention of investors quite like the other funds.

Deepika, who originally commented about this ETF wrote that this gives a feeler of safe and attractive returns, and if you look at the chart below which shows the returns of the Nifty BeES along with Junior BeES you will see why she says that.

The Junior index has run up quite a bit this year and that’s probably the reason behind the interest in the index. A few months ago I did a post on the leading Indian indices and their performance details, and that post has 10 year returns data as well which shows that the Junior index did better than the Nifty in the 10 year period but the Sensex did better than both in the 10 year period so you can’t really conclusively say that the mid caps are better than large caps.

As far as returns are concerned you see that the Nifty and Nifty Junior are quite close and it’s impossible to say which will do better in the next 5 or 10 year period.

As far as safety is concerned, I think the calendar year returns chart for both the funds tells a great story. Here is the chart with data from Moneycontrol.

As you can see, Junior BeES fell a lot more than Nifty BeES during bad years, and rose a lot more than it during the good years.

This is what you’d expect of an ETF comprised of relatively smaller cap stocks and it paints an instructive picture.

While the returns in the past may be similar or even better, they came with a higher volatility and you must have been willing and able to stomach that.

Personally, I’d favor the Nifty ETF instead of the Nifty Junior ETF because of the lower cost, lower volatility and higher assets under management.

This post is from the Suggest a Topic page.

It seems that every newspaper in the country used the exact same headline to describe that March 2012 had record FDI inflows of $8.1 billion which is 8 times the figures last March and this great number makes all the fuss about the Vodafone issue irrelevant

This is great news right? The country is doing so great that investors are falling head over heels to invest in the country despite all the flip flops that the government has done over policy issues in the recent past.

You should really be happy about this and stop reading beyond the headline.

Because if you read beyond the headline you will notice the following paragraph:

The USD 7.2 billion Reliance Industries-British Petroleum (BP) deal, announced in February 2011 contributed significantly to the inflows, even though funds from the UK oil major would have come in phases, they said.

Given that this deal was done in February of 2011, and that the statement clearly implies that BP hasn’t paid the entire $7.2 billion in March – how can you juxtapose this number against the Vodafone issue and say that it proves anything at all?

On the contrary I’d say that if you remove the $7.2 billion, then March FDI only amounts to 0.9 billion and that’s less than what they managed in March of last year!

Anyhow, since we are talking about FDI, here are the annual FDI inflows since the beginning of 2000 and that shows that there has been a gradual uptick in FDI over the years, and that’s something to be happy about, but at the same time, you can’t take this for granted as there are a lot of other great opportunities worldwide that investors have access to.

The numbers are in millions of dollars; here is the spreadsheet with the data and here is the source of the data. If you follow the stock market much (which you probably do) you may even be inclined to say – hey we haven’t beaten the 2008 highs yet!

Correction: Changed the deal month from March of 2011 to February of 2011.

Updated: 28th Dec 2012

Continuing with the theme of fixed income, let’s look at some of the best fixed deposit interest rates that are on offer for senior citizens right now.

While it is common to see banks offer 0.50% extra over their regular fixed deposits to senior citizens, it is wrong to assume that the difference is always 0.50%. Some banks offer 0.75% and in the case of Yes Bank, they currently offer 1.0% extra over their regular fixed deposits.

The key thing that stands out from the list below is that there are several banks that offer upwards of 10.00% for a senior fixed deposit and that’s the minimum you should look for in today’s environment.

That’s the final list sorted according to the best interest rates I could find.

 

S.No.	Bank	Tenure	Interest Rate
1	Dhanalaxmi Bank	400 days	10.00%
2	Yes Bank	15 months 15 days	10.00%
3	South Indian Bank	1 year to less than 2 years	9.50%
4	Karur Vysya Bank	Above 2 years to 3 years	9.75%
5	Lakshmi Vilas Bank	1 year	10%
6	Karnataka Bank	1 year to 5 years	9.50%
7	City Union Bank	1 year	10%
8	State Bank of Patiala	555 days	9.50%
9	Axis Bank	18 months to 5 years	9.75%
10	Indian Bank	9 months and above	9.50%
11	Syndicate Bank	364 days to 2 years	9.25%
12	Bank of India	1 to 2 years	9.25%
13	Tamil Nadu Mercantile Bank	20 months 20 days	9.75%
14	Punjab and Sind Bank	500 days	9.75%
15	IDBI Bank	1 year to 5 years	9.75%
16	J&K Bank	1 year to 10 years	9%
17	Vijaya Bank	1 year and above	9.50%
18	Indian Overseas Bank	1  – 10 years	9.50%
19	ICICI Bank	2 years to less than 5 years	9.50%
20	Kotak Bank	1 year	9.50%
21	Andhra Bank	1 year to 10 years	9.50%
22	Corporation Bank	12 months and above	9.25%
23	Federal Bank	1 year to 3 years	9.50%
24	State Bank of Travancore	1 year to 3 years	9.25%
25	Canara Bank	1 year to 10 years	9%
26	Bank of Baroda	1 year	9.25%

One final thing about this is if you’re opening a senior citizen fixed deposit you should be aware of form 15H which you can use to prevent the bank from deducting tax at source if your total income for that year is expected to be lesser than the taxable income limit. Here is a good link that explains form 15H and form 15G in detail.

Edit: Corrected error pointed out by Paresh