A safe investment sounds like a paradox, considering the jaw-dropping
losses investors suffered during the global financial crisis. Be it
stocks, bonds or real estate portfolios, the crisis swept across all
asset classes, giving investors sleepless nights. Although experts are
of the view that the worst is behind us and the scepticism seems to have
waned, one still needs to be careful about where he invests. Dhirendra
Kumar, CEO of Value Research, insists that there is no such thing as an
'invest and forget' approach.
Only bank deposits and
small savings schemes could qualify for this tag. These are perhaps the
least favoured currently owing to the reduced rate of interest on fixed
deposits and the cap on investment in some small savings schemes. In
fact, the rate of interest offered on deposits is unlikely to beat
inflation in the future. For instance, if you fall in the 30 per cent
tax bracket, an interest of 7 per cent per annum earned on a one-year
deposit translates to a 4.9 per cent post-tax return, which is just
under the inflation target of 5 per cent set for this year. The other
disadvantage of banks is that only up to Rs. 1 lakh of your deposit is insured by the government.
If you want to earn more,
you could consider corporate fixed deposits, which, in the past two
years, have offered better rates of interest. However, this comes with
an additional risk. While small savings schemes carry the sovereign tag,
you can invest only up to Rs. 70,000 in
the Public Provident Fund (PPF). Also, the interest earned on your
investment in the National Savings Certificate (NSC) is not exempt from
tax, which brings down your effective rate of return. The advantage of
such investments is that they are the lowest on the risk spectrum.
However, as most of us want some good returns as well, it may be prudent
to opt for investment avenues that offer better riskadjusted returns
and perform decently in a down market. Ultimately, it's this perfect
combination that is going to allow you to get a good night's sleep.
So, is there any such
investment? Kumar suggests that investors look at income funds from a
longer term perspective for a fixed income portfolio. Most income funds
have an exposure to AAA-rated bonds with no suspicious investment in
their portfolio, he says. In the long run, these funds fetch better
returns than other short-term funds. However, he adds, investors might
be saddled with capital loss in case of a sharp rise in interest rates.
Generally, these funds have managed interest rates with dynamism. The
maturity of the underlying portfolio of income funds has ranged between
one year and 15 years within the same fund, which clearly proves their
claim.
One could also invest in
arbitrage funds, which primarily generate income by capitalising on the
mis-pricing between the cash market and derivatives market. Every
purchase in the cash market is matched by a corresponding sale for the
same quantity in the futures market. As arbitrage funds do not take any
directional calls, these too are low on the risk spectrum and offer
attractive tax-free returns of 6-7 per cent annually. The tax treatment
for these funds is the same as for equity-oriented funds.
In the future, the biggest
concern for investors will be to beat inflation. While investing in
equities is considered riskier than in bonds, in reality, inflation
could eat into the returns of a fixed income portfolio even as equities
offer a hedge against inflation, says Parag Parikh, chairman, Parag
Parikh Financial Advisory Services. This does not mean that you should
blindly invest in stocks and equity funds at the cost of your risk
tolerance. Buy stocks or funds that offer you returns commensurate with
your risk appetite, but make sure there's some cushioning if the markets
become negative.
Take dividend yield funds.
These are known to be less volatile during a downturn because they
invest in defensive sectors. They refrain from high-growth, high-PE and
momentum stocks. Instead, they invest in high cash flowgenerating
companies with low volatility in earnings. This offers them some
cushioning when the stock markets plunge.
Source: Money Today
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