Fixed rate schemes have regained its charm in last 2 years owing to a volatile stock market and dwindling growth numbers. Fixed rate provides safety of capital as well as returns. This is relatively safer investment than stocks and equity oriented mutual funds. For most of investors, fixed rate scheme means fixed deposits in banks and Government schemes. While banks and Government schemes are almost risk free, there are others which may expose investors to little risk but provide a better return.
No scheme is better than the other. Investment always works on risk reward concept. It is investors who have to decide what they want from any investment and invest accordingly. Let’s discuss some of the fixed rate schemes alternatives available to investors.
Infra bond schemes
All of us have heard about the ambitious plan of Government to spend $1 trillion in infrastructure in next 5-10 years. This will give much needed impetus to infrastructure growth. Investors can invest any amount in the infra bonds but the tax deduction will be available on only Rs 20,000. There are companies such as NHAI, IDFC, L7T, and many infrastructure companies that have issued bonds recently.
Investors must invest in this as this gives tax break. However, since the rate is 8%-8.5%, it doesn’t make sense to invest more than Rs 20,000 in infra bonds. Up to Rs 20,000, if you factor tax deduction, the returns can be anywhere between 10% and 18%. However, beyond Rs 20,000, there is no tax deduction and hence the investment will yield only 8% to 8.5%.
Corporate fixed deposits
Many times, companies invite fixed deposit from investors and agree to pay certain interest rates just like banks. Tata motors and Mahindra Finance, among others, have offered fixed deposit schemes to investors at a rate of 10.25%. Investors can choose when they want to receive the interest, either quarterly, monthly, or yearly depending on the alternatives available in the scheme.
Investors should check the ratings assigned by the schemes by rating agencies such as CRISIL, ICRA, and CARE etc. These ratings judge a company’s ability to pay the interest and principal. For example, Mahindra Finance scheme is rated FAAA which is the highest rating. This means Mahindra Finance is sound enough to pay its obligation to investors. Rating also signifies risk of default. A lower rating indicates high risk of default. Schemes by lower rated companies offer higher rate of returns. Investors should inquire further when they see unusually high rate of interest on company deposit.
Bank fixed deposit
We are all familiar with bank FD. This is the most popular investment in India. In high interest rate era, bank FD is very attractive. Today, banks are offering good rates on fixed deposit. In fact, few banks like Bank of Baroda and SBI have FD scheme to offer over 10% returns. Bank FD is also safe as most of the banks have enough checks and balances not to risk people’s money. At the end, there is RBI which can bail out banks anyway.
Investors, who are more concerned about safety, should go for bank FD.
Debt oriented mutual fund
Debt oriented mutual fund is also known as conservative fund. They invest major part of their capital in debt instruments (such as bank FD, Government securities, and high grade corporate bonds etc.). They also invest a small part of their portfolio in equities and hence this is little risky than bank FD and company FD. Many of these mutual funds can pay returns at every interval. Since the risk is high, the average returns can be in the range of 12%.
Before investing, Investors should know what proportion goes into equity market. This will set the right expectation on returns and volatility of returns. If the proportion is 30%, rest assured that returns will vary widely.
Fixed maturity plan
Fixed maturity plan or FMP is a mutual fund where investors get the interest and principal at maturity. They offer “expected” returns of 9%-10% depending on how the businesses perform. FMPs invest in Government securities, corporate debt, and fixed deposit.
Investors should compare various FMPs before buying one. This certainly offers a much better rate (post-tax) than bank fixed deposits. The tax calculation includes indexation which reduces tax liability on investors. Indexation is essentially factoring inflation into price of FMP while calculating taxes. For example, if you buy FMP worth Rs 10000 and get Rs 20,000 on maturity, the tax in case of bank FD will be calculated on Rs 10,000 (difference of purchase price and maturity amount). In case of FMP, the purchase price will be revised upward using indexation. Suppose the price (with indexation) is Rs 12,000, tax will be calculated on Rs 8,000 (difference between indexed price and maturity amount). We will have another article on tax implication of various plans.
Other Government schemes
There are other Government schemes which offer fixed rate of interest such as post office monthly income scheme, national savings certificates, and Kisan Vikas Patra etc. Investors can look for more details on these instruments in our next article.