IF AT the beginning of 2009, somebody said share prices would double, he would end up being laughed at. After the collapse of marque institutions such as Lehman Brothers, investors in all asset classes were staring down the barrel of a crisis. This prompted governments the world over to unveil a slew of fiscal stimulus packages. The concerted action had the desired effect of thawing the credit markets, and, by March, greenshoots sprang and equity markets began a rebound. However, the recent events in Dubai and Greece, where sovereigns faced difficulty in repaying debt, have brought the spotlight back on risk-free investments. We help you find some safe avenues.
LIQUID/LIQUID PLUS SCHEMES
These money market funds, that invest in securities of maturity less than one year, could become the darlings of investors in 2010. Largely because as interest rates rise in the course of the year, their returns could also rise gradually. These schemes currently deliver around 4.5-5.5% on an annualised basis. But this could easily rise to 7-8% by the end of 2010. (Instruments of very short maturity do not lose value when rates rise, unlike instruments with longer tenure).
• RETURNS BETTER THAN SAVINGS ACCOUNT
• THE TICKET SIZE IS HIGHER
LIFE INSURANCE PLANS WITH GUARANTEED RETURNS
Life insurers such as LIC and IDBI Fortis sold guaranteed plans in 2009, which sought to deliver a fixed rate year after year. Investors can expect more of such schemes in 2010, albeit only marque names should be trusted for their promises. Steer clear of schemes that project certain rates. LIC's Jeevan Astha said it would notch over 6% annualised return in its scheme. 2010 could bring schemes that raise the bar higher.
• GUARANTEED RETURNS FOR MANY YEARS
• THE INSURER SHOULD STAY SOLVENT
NSC/POST OFFICE SAVINGS/KVP
Small savings have been gaining in popularity since late 2008, with their returns being better than those delivered by bank fixed deposits. Investors also ran to the safety of small savings because these instruments are guaranteed by the government. At a time when the ability of the debtor to pay back is increasingly on the minds of people, they would continue to attract investments in 2010.
• SPECIALLY MEANT FOR SMALL-TICKET INVESTMENTS
• REDEMPTIONS TROUBLESOME
SHORTER TERM PLANS & FLOATERS
Unlike bond funds, both these varieties do not lose value when interest rates rise. In fact, the yields on floaters only go up, thus increasing the returns for investors. This is because the coupons of floating rate securities, that make up floater funds, also go up. Floaters deliver around 5-7% currently — a number that should rise in the coming days.
• DELIVERS BETTER WHEN RATES RISE
• EXIT PENALTY IS HIGH
FIXED MATURITY PLANS/ARBITRAGE FUNDS
Fixed Maturity Plans (FMPs) are closed-ended funds of varying maturity up to a year. Since they are closed ended, the fluctuation in the yields of securities is irrelevant. They roughly deliver the yield that they indicate at the start of the scheme — a number that could be headed north in 2010. Arbitrage funds, that seek to benefit from the difference in the prices of shares and share futures, also do well in a bullish stock market.
• BETTER ALTERNATIVE TO LIQUID PLANS
• MFs ARE NOT ALLOWED TO GIVE INDICATIVE YIELDS
RBI'S GOVERNMENT BONDS/ NABARD BONDS
RBI's Government of India (GoI) savings bonds and Nabard's deep discount bonds are a conservative investor's most trusted weapon for reasonable returns. For instance, GoI bonds currently carry an 8.5% rate of interest. Nabard's Bhavishya Nirman Bonds are a 10-year zero coupon bond that offer around 12-13%.
• SOVEREIGN GUARANTEE
• TAXED HIGHER, UPFRONT COMMISSIONS APPLY
FIXED DEPOSITS/RECURRING DEPOSITS
Now, whether banks will raise rates on bank deposits once RBI raises signalling rates is a matter of debate. But, most financial planners are telling investors to wait for RBI governor D Subbarao to get started with raising rates. They feel bank deposits could make a comeback then.
• SAFETY OF BANKS
• INTEREST PAID MAY NOT RISE PROPORTIONATE TO RATE HIKES IN THE SYSTEM
PUBLIC PROVIDENT FUND (PPF)
If there is one instrument that helps in tax planning and has the safety of sovereign backing, it's public provident fund (PPF.) However, at 8% — the return it offers currently — it may not be worth the lockin it comes along with. PPF does not allow you to withdraw any funds till five years of original investment.
• IDEAL FOR CONSERVATIVE INVESTORS
• EXIT VERY DIFFICULT
CORPORATE DEPOSITS
Most companies that have raised huge funds through banks and other bulge bracket investors would increasingly tap retail investors in 2010. This would be a good opportunity for individuals to lock in handsome returns — a company has to offer rates better than bank fixed deposits to attracts retail investors. Many companies like Mahindra & Mahindra, Kirloskar, TV18 and Tata Motors paid around 11-11.5% for deposits in 2009. With rates rising, this number should only go up.
• HIGH RETURNS
• DEPENDENT ON SOLVENCY OF COMPANY, INSTRUMENT MOSTLY NOT SECURED
STRUCTURED PRODUCTS — CAPITAL GUARANTEED
Structured products are usually available in the wealth management space for higher ticket investments. Here, the coupon is linked to the performance of an index or a stock. In a rising market, this could be ideal. Most capital-guaranteed schemes also have an in-built feature where the value of a fund never falls before its initial value.
• STOCK MARKET LIKE RETURNS WITH CAPITAL PROTECTED
• HIGH COSTS, DEPENDENT ON ISSUERS FINANCES
