In uncertain times such as this, when the economy is going through a turbulent phase, where the inflation is still on the higher side and the monsoon remains unpredictable, one can never precisely gauge when the situation can go according to expectation or otherwise.
On such instances what can an investor do to ensure clarity in his investments, especially in the case of interest rates waiting to stabilise.
For example: Mr A wants to invest money in a long term Fixed Deposit for three years, but is expecting the interest rates to go up, then what should he do with the funds lying with him?
Or if he wants a home loan, but believes the rates will come down. Where should he park his money? With a short time horizon are there any options?
Savings account
The obvious choice would be a savings account where Mr A can put away his money for a short term. The rate of interest in the savings bank account is 3.5 per cent per annum as mandated by the government.
Also, now banks have to calculate interest paid on money kept in the savings bank account on a daily basis, so this would serve to be a good opportunity to reap those benefits.
One year fixed deposits
These are ideal avenues for earning interest on Mr A’s idle money, which he has set aside for his use after a year or so. This will fetch him an interest rate of around 6.5 per cent.
Liquid funds
Liquid funds are a very popular choice if the investment is for a small duration. These funds invest in very short-term securities such as commercial papers, short-term treasury papers and bank deposits. They are not affected by interest rates fluctuations.
So, if Mr A holds on till the maturity of the product, then he would stand to gain from a rising yield. With returns of around 4-5 per cent , it is a good investment option. Also, with interest rates expected to rise, the returns would increase. It provides good liquidity, low interest rate risk and the prevailing yield in the market. Also dividends from liquid funds are tax-free in the hands of the investor.
Floating rate funds
These are another good option when interest rates are expected to rise. A major portion of its corpus is invested in floating rate instruments. The coupons go up when interest rates rises, thus fetching the investor better returns.
Sweep-in/sweep-out
This kind of facility is offered by banks nowadays. This facility provides the liquidity of savings account and at the same time higher returns of FD. In this facility, the bank sweeps the account and removes any funds in excess of the minimum balance.
The bank automatically invests those funds in an account one selects, thereby earning a higher return than a bank savings account. Further, this is not of a fixed duration. In case Mr A wants to withdraw more than his average balance, the amount will be given from the fixed deposit.
Fixed Maturity Plans
Fixed Maturity Plans (FMPs) are income/debt schemes giving a fixed return over a period of time. They are actually similar to fixed deposits in banks.
The maturities offered are varied, going from one month to three years. They are close ended schemes, which are open only for a fixed period of time during the initial offer. While the money is locked, FMPs give the investor an option to exit, which is subject to an exit load as per the fund regulations.
Returns on FMPs are indicative as there is a possibility of the actual returns deviating from what has been indicated to investors. The instruments are held till maturity, thus not getting affected with any interest rate fluctuations. The schemes have low credit risk as investments are mainly done in AAA or P1+ rated instruments on short-term maturity profile.
Further, it has minimal liquidity risk as they invest in short-term instruments, which give them adequate liquidity. Also the churning cost is very low as the instruments are held till maturity.
Thus an individual depending on his risk appetite, tenure of holding and income tax standing should decide where to invest. It is always better to keep your money working, so earn better returns till one gets certainty.
(The writer is CEO of bankbazaar.com. He can be contacted at adhil.shetty@
bankbazaar.com)