Tread with soft toes

YOUR MONEY

Suddenly, the returns of 8-9.5 per cent that are being offered by fixed deposits or debt funds seem meaningless as they have turned negative, even before taxation.

Also, there is little solace from the equity market with the Sensex slipping from 21,000 points in January, 2008 to close at 14,571 on Friday, a drop of 6,400 points (over 30 per cent). This means the Indian consumers are getting squeezed from all sides: low returns and a high cost of consumption.

And people are beginning to feel the pinch. Ask Protima Dasgupta, 58, entrepreneur in Vikroli , Mumbai, and there is a sense of helplessness about the scenario. "The prices of refined sunflower oil is at Rs 110/kg. I feel bad for our 70 employees because we cannot hike salaries every three months," said Dasgupta.

It's easy to panic in such a scenario but financial consultants are advising against it despite the uncertainty about all asset classes. Said Kartik Jhaveri, director, Transcend India, "Moving money from your equity investments is not a great idea at this time."

Yes, the outlook for equity is not that good in the short term, but it would be a better play over a three-five year period. Said Sanjay Singh, head, equities, SBI Mutual Fund, "One could start staggered investment in equities now and only through equity-diversified funds." So high-returns and high-risk sector funds and thematic funds are out, at least for the time being.

However, in the debt space, there could be some hope. Investors could look at short-term floating rate funds and liquid plus schemes according to Mukesh Dedhia, director, Ghalla and Bhansali.

And the differentiation between liquid and liquid-plus funds should be clear because the former attracts a dividend distribution tax (DDT) at the rate of 25 per cent whereas the latter is taxed at 12.5 per cent. Both the categories are offering 8-9 per cent a year.

Even fixed maturity plans (FMPs), which have been offering 9 to10 per cent, could be good, but there is a higher risk. "The basic idea should be that one should not lock themselves in any debt scheme that is over one year's time because long-term yields are likely to suffer for some time," said Dedhia. And once the outlook on inflation/interest rates are clear, one could move into long-term debt funds.