RISK-PROOF YOUR FUTURE WITH EQUITIES
Given the diminishing returns on risk-free investments, even cautious investors need to look beyond them—at equity, for example
Investors with a low risk appetite have seen their returns fall quite dramatically in the recent past, be it on small savings instruments like Public Provident Fund (PPF), National Savings Certificates (NSC), Kisan Vikas Patras (KVP) and Post Office Monthly Income Schemes or fixed/ recurring deposits in banks. Unlike the early 2000s that saw double-digit rate of returns, the interest rates for small savings instruments are currently hovering around 8 per cent.
Interest rates on small savings schemes have been linked to government bonds since 2011. The 15-year PPF account currently offers 7.6 per cent interest, the same as NSCs, while KVPs offer 7.3 per cent. The Sukanya Samriddhi Yojana (for the girl child) and Senior Citizens’ Savings Scheme are more attractive, offering 8.1 per cent and 8.3 per cent returns respectively, but they are open to select groups. Bank FDs offer interest rates of around 7 per cent, but the actual returns amount to much less after tax deduction.
Given the inflation trends, the returns from small savings schemes may not be enough to build a robust retirement corpus or take care of major expenses, such as illness, children’s education, etc. “If someone wants assurance of yield, they are better off going for traditional investments, such as small savings schemes,” says Lakshmi Iyer, chief investment officer and head (products) at Kotak Mutual Fund. “But, apart from stability, you will get nothing else.”
Interest rates, however, have witnessed a turnaround of late, with the Reserve Bank of India (RBI) increasing the repo rate twice by 0.25 per cent in the past few months. The rates could go up further in the next few months if inflation remains at its current levels or goes up further.
If you are not satisfied with the returns on your small savings investments and are looking to maximise gains without taking undue risk, what are your options? In the world of investments, one size seldom fits all. So you should keep in mind that higher returns come with a certain degree of investment risk. Here are
a few options that have the potential to provide better returns than bank FDs or small savings schemes in the medium to long term.
DEBT FUNDS TO THE RESCUE
Debt funds typically invest in government securities and other debt securities that enjoy a high credit rating from independent credit rating agencies. The risk of default in these securities is very low. The following debt fund types can help enhance returns on your investment at low risk.
Fixed maturity plans (FMPs): These are a superior alternative to bank FDs as they tend to lock in rates at higher levels. FMPs are actually close-ended debt funds that invest in debt and money market instruments, such as treasury bills, commercial papers, certificates of deposits, government and corporate bonds. One can invest in FMPs only during a new fund offering. The invested amount remains locked in for the duration of the FMP. One can sell FMPs in the secondary market before maturity, but liquidity is generally low. FMPs of a duration of more than three years bring indexation benefit on the capital gains, significantly reducing your tax liability.
Hybrid funds: These are a mix of debt and equity. Hybrid funds offer an upside of debt and are also tax efficient. “For conservative hybrid funds, generally 75-90 per cent of the investment is directed towards debt instruments. They are a good option for investors who want to play safe in the current market,” says Brijesh Parnami, executive director and CEO at Essel Wealth Services. Conservative hybrid funds can be bought and sold like any other mutual fund. Since the equity exposure is less than 65 per cent, these funds are treated like debt funds for tax purposes— short-term capital gains taxed at the slab rate of the individual and long-term capital gains (above three years) at 20 per cent with indexation benefits. The funds are ideal for first-time investors who want little exposure to equity. The utility of these funds is best realised during downturns in the stock markets.
Equity savings fund: Equities tend to deliver higher returns in the long term. And it makes sense to include equity exposure in your asset mix. How much depends on your age, risk profile and investment horizon. Within the hybrid category, equity savings funds put 65 per cent of the assets in equity and equity-related instruments and 10 per cent in debt. Hedging as well as debt exposure brings down the risk factor. These are open-ended schemes. “Given the market volatility, even a first-time investor can consider equity savings funds,” says Iyer. For taxation, the funds are treated the same as equity funds: long-term capital gains above Rs 1 lakh are taxed at 10 per cent.
BOOSTING YOUR RETIREMENT CORPUS
The Employees’ Provident Fund (EPF) forms a sizeable portion of your pension corpus, but to many, the interest rate offered (8.55 per cent for FY2017-18) may not seem as attractive as the returns on equity investments. The high return potential of equities in the long term has compelled even authorities managing EPF and the National Pension Scheme (NPS) to allow some equity exposure to your contribution. The Employees’ Provident Fund Organisation (EPFO) invests 15 per cent of contributions in equities. NPS subscribers can contribute to a pension account during their work years. On retirement, they can withdraw up to 60 per cent of the corpus and use the remainder to buy an annuity plan to get a regular postretirement income. Regular income through annuity is taxed at the slab rate of the individual. One can choose between eight pension fund managers. “NPS is a very convenient and flexible way to build a corpus, with an equity upside for retirement at a low cost and by saving tax,” says Deepak Jasani, head of retail research at HDFC Securities.
NPS offers the flexibility to design one’s portfolio, as per one’s risk appetite, distributing the contributions between equity, debt and government bonds. The maximum equity exposure allowed is 50 per cent. The returns from NPS are market-linked, but equity exposure helps beat inflation, making it a superior choice to debt instruments. NPS funds stay locked till the age of 60. But conditional partial withdrawal is allowed for contingencies.