Here are some debt options for investors who are risk-averse and find the volatility in the equity markets too high
Inflation is an on-going rise in the cost of goods and services. Inflation numbers that were 8.62 percent in September 2010 dropped further for the second consecutive month to 8.58 percent in October. Inflation is expected to ease further by the year end. In reality, inflation erodes returns from investments. If it is eight percent, something that cost Rs 100 a year ago, costs Rs 108 today. In other words, it is the risk that money obtained in the future will be worth much less than what it is today.
Let us consider the impact of inflation on his annual returns from investment. It is assumed that since this is the only income earned that year, the returns are tax-free as it is less than the minimum taxable salary.
Here are a few debt instruments and the returns they yield:
Tax-saving bond
Tailored for investors with a low risk appetite, preservation of income is its primary goal. Tax-saving bonds are issued by both public and private sector organisations.
Long-term infrastructure bonds are aimed at enhancing investments in infrastructure projects in the country. With tenure of 10 years and a minimum lock-in period of five years, these exhibit highest degree of safety. The yield on these bonds is between 7.5 and eight percent, depending on the tenure and the type of bond product.
Depending on the applicable tax slab, individuals investing in tax-free infrastructure bonds can benefit from a tax saving of Rs 2,000 to Rs 6,000 per annum, under Section 80CCF. The interest earned is taxable though.
Debt fund
Debt mutual funds are invested in a slew of debt instruments such as corporate bonds, government securities and money market instruments through income funds, gilt funds and liquid funds. Compare the past performance and returns delivered before choosing a debt fund.
The returns carry a degree of uncertainty unlike other traditional debt products. If redeemed within a year of investment, the returns are taxed at slab rates and beyond that as long-term capital gains. Dividends earned are subjected to dividend distribution tax, which is withheld by the fund house before dividend disbursement.
Public Provident Fund
The Public Provident Fund (PPF) is one of the most attractive investment options for play-safe investors, currently offering eight percent tax-free returns. A PPF account can be opened with any nationalised bank or post office. Open only to resident Indian individuals, Rs 500 is the minimum investment per year and Rs 70,000 is the maximum investment per year in a PPF account.
An investment in PPF up to a ceiling of Rs 70,000 is also allowed as a deduction from taxable income, under Section 80C.
Employee Provident Fund
The salaried class typically invests in the Employee Provident Fund (EPF), as it is mandated. Generally, it is 12 percent of monthly basic salary. One can augment this and invest additional money in their EPF account. This is called Voluntary Provident Fund (VPF).
There is no upper limit on the amount that can be invested in an EPF account per annum. Current returns on EPF are eight percent and the returns are tax-free. A deduction of up to Rs 1 lakh is allowed under Section 80C.
Post office monthly income scheme
The post office monthly income scheme (POMIS) gives eight percent return per annum, payable monthly. This is ideally suited for someone looking for monthly returns on a totally risk-free investment product. With a maturity period of six years, one can invest up to Rs 6 lakhs in a joint account. Otherwise, a maximum of Rs 3 lakhs can be deposited in a single account.
The returns are not tax-free though.
Inflation holds key
Unless inflation is pegged a few more percentage points down, the returns from debt instruments will continue to remain unappealing. Long-term investors who are saving for retirement must retain a significant exposure to equity to beat inflation.
