By Ms. Vidya Bala, FundsIndia.com
It is that time of the year when investments like Fixed Maturity
Plans (FMPs), mostly invested by you for double indexation tax benefits, mature
& swell your bank balance.
Are you allowing this money to lie in your account even if you have
no near-term requirements for it?
Here are the risks you run:
* It simply vanishes as it
is spent in no time.
* If you decide to wait for
an opportune time to invest, you miss out on returns while your money earns
just 4 % in your savings account.
* Given that interest rates show all signs of
having peaked, you may end up settling for lower returns later.
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Ms. Vidya Bala, FundsIndia.com
So what should you do with the investment maturity?
You have a few choices.
* One, invest in a bank fixed deposit (FD). Yes, while the returns
at nearly 9 % may seem reasonable, the post-tax returns at under 6.5 % (30 %
tax bracket) hardly provide you with inflation-beating returns.
* Two, you could once again look up for FMPs with similar
maturities & reinvest.
You can consider doing this if your requirement is as follows:
* You do not need any liquidity and are okay locking in the money
at this stage.
* If you actually have a financial requirement coming up in the
next 1 to 2 years. In that case, you can choose an FMP that fits the time frame
of your goal & reinvest.
Ensure that the FMP’s scheme information document states that the
money will either be invested in certificates of deposits (CDs) or / commercial papers (CPs); else in top-rated
bonds.
The flip side of investing in an FMP without a time bound goal for
your money is that you may end up with reinvestment risk, that is, the risk of
being in a low interest regime when you get the money after maturity a year or
/ two later.
Debt Mutual Funds..
Hence, if you do not have any goal & may actually need
liquidity at some point, then you will be better off going for open-ended debt
funds. In this category, you will benefit from the following:
* Capital gains indexation benefit similar to FMP, if held for over
1 year.
* High liquidity with option to exit any time.
* Benefit from interest accrual on the underlying instruments as
well as capital appreciation when rates fall.
But the choice of debt funds would depend on your time frame. We
suggest the following funds for a 1 to 2 year time frame and also for a 2 plus
year holding period.
Short Term Debt Funds (1-2 Year Time Frame)
This category is suitable if you are not sure when you will need
your money, but can hold for not less than a year. You will mostly find funds
loaded with certificates of deposits & commercial papers in this category.
Such funds also account for a majority of our ‘Select Funds’ in
this bucket.
But, we would like to slightly tweak our approach to focus a bit
more on funds that invest in corporate bonds as opposed to primarily CDs
&CPs. While a portfolio with CPs & CDs will certainly hold a lower risk
profile, we think the recent dip in yields in this category has already
provided some returns.
HDFC Short Term Opportunities
and Templeton India Short Term Income Plan are our picks in this space.
Both the funds have higher exposure to corporate CDs with the HDFC
fund sporting more AAA - rated bonds while the Templeton fund has higher weight
to AA-rated bonds. The yield to maturity and average maturity of the Templeton
fund is higher and therefore its risk profile is a notch higher.
Birla Sun Life Short Term and Templeton
India Income Builder Account are the two funds of our choice in this
category. Why these two funds? Because they keep their duration reasonably
consistent and also avoid higher portfolio maturities.
Besides, they follow an accrual approach with a good chunk in
corporate bonds.
Of the two, Birla Sun Life Short Term Plan has higher exposure to
AAA-rated securities, while Templeton Income Income Builder has more weight for
AA-rated corporate bonds such as Power Finance Corporation, L&T Finance and
other popular corporate houses. These funds can benefit from any rate cut and
ensuing price rally as well.
You do not need to stagger your investments in the above debt
funds. Lump sum investments are fine, especially given the prevailing rate
scenario. Reinvest you money now to avoid opportunity loss and also gain tax
benefits.
+91
7667 166 166
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