The Reserve Bank of India has set the interest rate cycle in reverse motion with a surprise 50 basis point cut in the repo rate last week.
The Reserve Bank of India has set the interest rate cycle in reverse motion with a surprise 50 basis point cut in the repo rate last week. A number of banks have since slashed their deposit and lending rates and others are expected to follow suit.
For investors, therefore, it is time to scramble and realign their portfolios in line with the rate reductions effected and expected ahead.
We bring you the top five investment avenues currently available.
Fixed deposits (FDs)
This may be your last chance to lock into an FD at a higher rate. Though a number of banks have already announced reductions, some are yet to do so — and therein lies your chance.
“FD rates may fall further, so this is probably the last change for risk-averse investors to lock in funds,” says Suresh Sadagopan, who runs Ladder 7 Financial Advisors. For taxpayers, the returns on FDs work out to 6.5-8.6% depending on the tax bracket, he points out.
Remember, you will have to go through the Know Your Customer, or KYC, procedure for booking an FD in a bank where you don’t have an account.
Public Provident Fund (PPF)
In case you fail to lock into an FD at the desired rate, there’s always the trusted PPF.
“For a conservative investor with a long-term time horizon (of 15 years or more), PPFs continue to be the best option as the post-tax returns are 8.8%,” says Jayant Pai, head - marketing, PPFAS AMC.
“Before you zero in on the products that you plan to invest, you need to decide the investment horizon and the post-tax returns. Instead of going in for the headline rates, you should calculate your post tax returns and invest only after that,” he adds.
Fixed maturity plans (FMPs)
Those with a time horizon of less than five years could look at FMPs.
Look at the indicative returns provided by the companies, which are generally in line with the actual returns one can get. Currently, indicative returns on FMPs maturing between one and two years are around 9.5-10%.
The added advantage here is the double indexation benefit, which kicks in when you hold the product for more than one year.
Indexation takes inflation into account while calculating the cost of acquisition of an asset. Double indexation provides inflation benefits for two years even though you have held the investment for a little over one year, say for 15 months.
This feature, in fact, makes FMPs more attractive than FDs.
Monthly income plans (MIPs)
Those willing to take baby steps into the equity world can try out the MIPs.
“These are hybrid funds that invest in both debt and equity and can allow you to have an equity exposure while keeping the most part in debt. However, if you are a conservative investor, then you should go in for an MIP that invests only up to 15-20% in equity,” says Pankaaj Maalde, head-financial planning, Apnapaisa.com.
National Savings Certificate (NSC)
The high interest rates being offered on fixed deposits may have led investors to give NSCs the miss, but with rates headed down, they could get back the shine before long. And so could other small savings schemes.
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