Investment ideas for a slowdown
As the economy fumbles, you’re probably looking for some new ideas. Here are five options you can lock into. Do note, though, that all investments have their risks, particularly now.
You don’t need your ear to the ground to know that the economy is in poor shape. What we’re dealing with is a weakening rupee, fumbling stock market, price increases, food inflation and lay-offs. Even trusted debt funds, thought to be able to see you through the bad times, have given negative returns. It’s a bleak scenario. At such times, you may be looking for a safe place for your money. Here are five options:
Fixed deposits: The go-to investment, particularly if you’re in the lowest income bracket. With the spike in bond yields, interest from FDs will certainly rise. In fact, just one day after the rupee hit Rs63 vis-à-vis the dollar (August 19), ICICI announced that it was raising its rates. The two-year deposit will yield 9%, up from 8.5%. In the coming weeks, you could expect many more banks, some of which are already offering better rates than ICICI (up to 10% for two years), to raise their rates. Locking your money in for a year or two would be a wise choice. The times are hard for banks, too, but remember that your FD (at every bank) is insured for Rs1 lakh by Deposit Insurance and Credit Guarantee Corporation in India.
Expected return: Up to 10% for one- and two-year FDs. Go here for best current rates.
Tax-free bonds: The government last week allowed 13 public sector units to issue tax-free bonds. These include National Highways Authority of India, Airports Authority of India and NTPC Ltd. They’re an excellent option for those in the upper two tax brackets. Though they could have same interest rates (for 10-year lock-in) as FDs, these are tax-free. FDs, on the other hand, are fully taxable at the slab rate. Tax-free bonds are long-term (10 to 20 years) in nature, but most of them will also be listed on the stock exchange, so you could sell them on the secondary market if you need to. While they are tax-free, though, these bonds aren’t risk-free. They have credit ratings, too. Given the current financial situation, it would make sense to play it safe with AAA-rated companies.
Expected return: Not issued yet. Could be over 11% if you’re in the highest tax bracket.
Fixed maturity plans: FMPs are closed-ended schemes that invest only in debt schemes. These schemes are usually announced when there’s an interest rate hike (like now!). They invest in one-year commercial paper (CP) or certificate of deposits (CDs), but can also be in year-long non-convertible debentures (NCDs). On the upside, they’re great because returns are predictable and offer good post-tax returns. On the downside, they offer no liquidity and there’s always the chance of default if you don’t pick the right scheme. For a comprehensive breakdown of these schemes, go here.
Expected return: Potentially 10%, with better post-tax returns.
Company FDs: For a small increase in risk over a bank FD, you can get a proportionate increase in returns. However, particularly in these times, it is essential to thoroughly research the fundamentals of the company. The best way is to check the credit rating of the issuing company. While you can’t always be certain that even highly-rated FDs will deliver, it’s very unlikely that large companies such as HDFC and LIC will default. These companies, however, also only give marginally higher returns than bank FDs. For example, while major banks are giving interest rates of 9.25% for a year, HDFC has raised its rate to 9.6% for 15 months. Go here to read about all the risks associated with these investments.
Expected return: Marginally higher than nationalised bank FDs in case of AAA-rated companies.
Non-convertible debentures: Company FDs are the more popular option, but secured NCDs are the safer option when the market is floundering. This is because companies have to get them rated by a credit rating agency and, more importantly, it is secured. In case of trouble at the issuing company, the NCD will be paid out before the FDs. It is true that, if a company is offering both at the same time, the FD will offer marginally better returns than the NCD, but for more risk. Currently, several NBFCs, including Manappuram Finance and Muthoot Finance, are looking to raise money via NCDs. Do remember to closely examine risk in these investments, though. If you want to be cautious, consider a shorter term investment of one year.
Expected return: Reportedly, Muthoot Finance will offer over 11% (see here), but perhaps for the longest term only.