2010 has been a tough time for those living on fixed income investments. Rising fuel and food prices have increased inflation and the middle class is struggling with its monthly finances. With inflation moving up due to rising commodity and oil prices, the central bank may be forced to increase rates in the near future despite already raising it six times in 2010. So, what should a fixed income investor do in such a situation?
Bank Fixed Deposits: Around 55% of Indian savings find their way to bank fixed deposits (FDs). The simplest of all investment products, a bank FD is easy to operate. All you have to do is walk in to your friendly neighbourhood bank and open an FD. In case of bank FDs, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. A point to be noted is that different banks offer different rates on FDs.
So, the rate offered by the State Bank of India (SBI) will be different from that offered by ICICI Bank or a foreign bank such as HSBC. “Most retired people find FDs easy to operate. The fact that they give an assured return is another positive,” says Harish Sabharwal, chief operating officer, Bajaj Capital. FDs are available across tenures ranging from seven days to 10 years. However, the interest rate on a seven-day deposit is merely 3% per annum, so choose your tenure accordingly.
With the recent revision in bank deposit rates, you could get as much as 8.5% per annum. If you are a senior citizen, you could earn 50 basis points extra on your FD. A 555-day SBI FD offers you an interest rate of 8.5% per annum. For a senior citizen, it goes up to 9% per annum. So, if you have not yet built your FD portfolio or are looking for higher interest from bank deposits, this could be the best time to get into it.
Post Office Schemes: The schemes offered by the post office give guaranteed returns and are attractive investment options. “These schemes find favour with investors who are looking for sovereign guarantee,” says Anil Chopra, Group CEO, Bajaj Capital. Interest rates here are fixed by the Government of India, and do not change often, unlike bank deposits. So, even though banks have revised deposit rates upwards, post offices are yet to follow suit.
Currently, National Savings Certificate and Post Office Monthly Scheme and Public Provident Fund offer you a return of 8% p. a. “NSC and PPF are eligible for deduction under Section 80C and, hence, find favour with some taxpayers,” says Anup Bhaiya, MD and CEO, Money Honey Financial . In addition, the Senior Citizens Savings Scheme offers you a 9% per annum rate of interest, but for that you need to be 60 years of age. “People generally flock to post office schemes when bank deposits pay lower than them,” adds Chopra. It would make more sense to invest in a PPF as interest income is tax-free.
Employee Provident Fund: EPF is a retirement benefit provided to the salaried class. Every month a small amount is deducted from your salary which is invested in the EPF account, with the employer also contributing a similar amount. On September 15, 2010, the Employees’ Provident Fund Organisation raised the interest rate by 1% for 2010-11 to 9.5%. This figure is the highest in the past five years. Liquidity is an issue in this and partial withdrawal is possible but only if you have completed five years of service.
Company Deposits: These are unsecured instruments. Their safety depends on the financial position of the company. Hence, investors have to be very careful while choosing a company. High returns come with higher risks. So, take the trouble of checking the company’s credit rating.
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