Stock markets are very volatile these days. In fact since 2009 it is moving within Range bound levels. Debt market has also become very volatile since May’2013. Government bond yields which were expected to come down had crossed 9% few days back and now is trading in a higher than expected range. Real estate which was presumed to be a safe investment option among investors, is also giving bumpy ride these days. Though there are many technical reasons to all this and it is also for sure that unless investor has allocated its investments in all asset class as per his risk profile, he’ll not be able to generate optimum return. No single investment can be called as best, but a portfolio has to be diversified in different asset classes which are not correlated with each other.
But still this kind of investment atmosphere has presented us with some investment options which are providing decent returns. Volatile interest rates and high G-Sec yields may be bad for open ended long term debt instruments but it has proved to be a blessing in disguise for other long term investors who are ready to lock in there money for longer time frame.Below are some of the suitable investment options
1. Fixed Maturity Plans: Fixed Maturity plans or popularly called as FMPs are close ended debt mutual funds which have a specific tenure and pre decided maturity date. Through these products Mutual fund houses collects money from the public and corporate investors and lend money to banks and other big corporate houses. So raising loans from mutual fund FMPs has become one of the popular route for the corporates and banks. Banks raise money by issuing CDs (Certificate of deposits) and Corporates by issuing CPs (Commercial papers). With the prevailing high interest rates in the market now days these CDs and highly rated CPs are offering attractive interest rates. And the tax efficiency feature of debt mutual funds (LTCG @ 10% before indexation and 20% after indexation) has always made it an attractive investment options as compared to bank deposits. So this is one of the investment options which should be considered by every investor where liquidity is not a concern. (Read : bank deposits Vs Debt Mutual funds)
But one should look at the KIM (key information memorandum) of the FMP to find out the intended portfolio of the scheme. It is advisable to invest in highly rated portfolio.
2. Tax Free Bonds: These are very Long term bonds issued mostly by Public sector undertakings. Being somewhat backed by government of India and having a kind of sovereign guarantee attached, these companies are highly rated by rating agencies. Also the interest paid out to the investors is fully exempt from income tax as per provision u/s 10(15)(iv)(h) of income tax act. The interest rates of these tax free bond issues are linked to G sec rates of that particular tenure. These bonds come with tenure of 10/15/20 years. Now days HUDCO tax free bonds (issue closing on 14th October’13) are in market with coupon rate of 8.39%/ 8.76%/ 8.74% respective to the tenure of investment. It’s a simple interest annualised payable. If someone is falling in tax bracket of 30% then the pre tax (without considering any surcharge, education cess) yield of these bonds will be 11.98% / 12.51%/12.48% respectively. If someone uses or invests this annual interest pay out effectively then this product provides with a one of the good tax free investment options.
3. Non-Convertible Debentures: Debentures are those financial instruments which corporates use to raise loans from public/corporates. These come in 2 variants- Convertible and Non- Convertible. As the name suggests Convertible Debentures are those which get converted into equity shares after a particular tenure and on the other side Non-convertible debentures are those which don’t get converted into equity shares and on maturity investor gets his money back. Unlike Corporate FDs, debentures are comparatively more secure, as in the situation of company getting wind up debenture holders are paid back much before. In fact debenture holders are paid back just after clearing off the government dues. These days many NCD issues are coming up and that too with good rate of interest (IIFL 12% NCD, closing on 04 October’13). Some NCDs are backed up with company’s Assets to provide investors with reasonable security. These are also rated by Credit rating Agencies. A good rating indicates reasonable assurance of safety and return of principal as well as interest. As Interest paid in these bonds are taxable, so this investment option is suitable to those who comes in lower income tax bracket. It is advisable to go with a secured and highly rated non-convertible debenture. (Also Read Investment Planning case Study)
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Consider these investment options for surplus money i.e amount left after allocating towards goals. One may consider the above mentioned investment options for the parking of surplus funds. All investment options above will be listed in stock exchange and will provide a necessary liquidity and trading platform to investors.
Will you invest in the investment options mentioned above? Do share your views.
