Safe returns, but illiquid

INSURANCE

A look at traditional debt instruments....

When the stock markets look uncertain, investors flock towards debt. It’s true that the returns are lower, but when safety of the principal amount is a priority, debt instruments become all the more important. The most popular form of debt investment is through bank fixed deposits (FDs) and the rates being offered now are lucrative as well at 10-11 per cent. But there are a large number of other traditional debt investment instruments that merit a glance as well, either for the tax benefits or safe returns over time.

As far as fixed deposits go, State Bank of India's (SBI), India’s largest bank, is offering 1,000-day fixed deposits at 10.5 per cent. The long-term (5-10 years) deposit is giving 9.25 per cent returns. This will be lowered to 9.5 and 9 per cent respectively in December, as per the bank’s website. The post-tax returns in these fixed deposits depend on the income slab of the investor. The best part — bank FDs can be liquidated within a day after paying a penalty of around 1 per cent.

Besides fixed deposits, Nabard's Bhavishya Nirman Bond (BNB) currently fetches the highest assured post-tax returns among all fixed maturity instruments, after FDs. However, these are long-term instruments. If you have a 10-year horizon and can make a minimum investment of Rs 8,500, you stand to make Rs 20,000 on maturity. The returns — a decent 8.93 per cent before tax. Post-tax, these bonds gives returns of 8.29 per cent. These bonds attract 10 per cent long-term capital gains tax.

However, liquidity is an issue. "In traditional investments such as the Nabard's bonds, National Saving Certificate (NSC) and Kisan Vikas Patra (KVP), investors need to understand that liquidating the investment during the tenure will be extremely difficult," said Sriram Venkatasubramanian, head, wealth management services, FCH Centrum Wealth Managers.

BNB are listed and investors who hold the bonds in demat form can trade them. But if they have to sell them in an emergency, they are not likely to get a good price because of the illiquidity. Others like NSC and KVP instruments have a lock-in period of three and two-and-a- half years, respectively.

KVPs offer pre-tax returns of 8.41 per cent but they do not have any tax benefit. With a minimum investment of Rs 100, investors can double their money in 8.7 years. For taxation, the interest is clubbed the income of the person and charged as per the income tax slab. The returns after tax work out to be 7.57 per cent (10 per cent slab), 6.73 per cent (20 per cent slab) and 5.89 per cent (30 per cent slab).

NSCs, on the other hand, are more tax-efficient. Investments made in this instrument up to Rs 1 lakh are entitled for benefit under section 80C of income tax. With minimum investment of about Rs 100, NSCs offer a return of 8 per cent. On maturity, the interest income is subjected to tax similar to KVPs.

Similarly, an investor can also look at bonds issued by government agencies and banks, for instance, Nabard Rural Bonds that have a 5-year maturity. The returns are 8.5 per cent and minimum investment is Rs 5,000. These bonds are also tax-efficient under section 80C of Income Tax. But the interest income is treated as income and taxed at source at the prevailing tax rates. The Reserve Bank of India too issues bonds at an interest rate of 8 per cent with 6-year investment horizon.

Public Provident Fund (PPF) too is the most widely used among the traditional debt-based instruments. A person can invest up to Rs 70,000 annually at an interest rate of 8 per cent. The interest in PPF account is given between the first and fifth of every month and there is no tax on the interest income when the account matures after 15 years.

Other instruments like post office's monthly income plans (MIP) too offer 8 per cent returns but they do not offer any tax benefit. In MIP, a person can have a maximum investment of Rs 4.5 lakh. Joint accounts can have double this limit. MIP has 6-year tenure.
 

SECURING YOUR MONEY Instruments
	Pre-tax  returns (%)

Post-tax (based on income slabs)

Min
INVEST (Rs)

10.00%20.00%30.00% National Savings Certificate87.26.45.6100 Public Provident Fund87.26.45.6500 Kisan Vikas Patra8.417.576.735.8100 Post Office Monthly Income Scheme87.26.45.61,500 Recurring Deposits7.56.7565.2510 Nabard Bhavishya Nirman Bonds8.938.298.298.29100 Nabard Rural Bonds8.57.656.85.955,000 RBI Savings Bonds87.26.45.61,000

Even recurring deposits offer (RD) around 8 per cent interest. It may differ from bank-to-bank but a post office RD has fixed interest rate. The duration of this account can range from a year to 10 years. A person can start savings with as low as Rs 100 per month. Interest income up to a limit of Rs 12,000 every year is exempted from tax.

As it is obvious, there are a large number of traditional debt instruments available for the investor. However, what makes them unpopular is often the lack of liquidity and lower returns. But it is a good way to start your investment process. "When a person starts saving in early years, most of them start with traditional instruments. Then they move up to asset classes such as equity as their income grows and so does their risk appetite," said Suresh Sadagopan, a certified financial planner.