The interest rates are rising. It is good news for some - those who look
at making deposits; bad news for some - those who are looking at taking
loans. Savings however have to be channeled carefully so that the
maximum can be gained from the deposits. Here are the top 5 savings
instruments in a rising interest rate regime.
In today's scenario the top 5 savings instruments are:
1. Debt Mutual Funds
2. Mutual Fund Monthly Income Plan - Growth Option
3. Company Deposits
4. Post Office Recurring Deposit
5. Post Office Monthly Income Scheme
Debt Mutual Funds
These are managed funds that invest the funds from the investors predominantly in debt and debt oriented schemes.
There
are a number of advantages that these mutual funds give compared to a
direct deposit. The most apparent is the fact that this is a managed
fund and the returns can be better as the manager has access to more
information and will leverage that compared to individual investors.
There is no TDS or tax on the interest. The returns will be processed as
capital gains.
Returns from this fund are expected to be good.
The top five debt mutual funds have given compounded returns in the
range of 10.50-14.50% in the last 3 years. This is much better than the
normal bank deposit or company deposit. The advantage is that debt
mutual funds can create capital gains when the interest rates go down.
Mutual Fund Monthly Income Plan - Growth Option
For
people who have a higher risk quotient during the short term, monthly
income plan (MIP) of mutual funds is good. Here a small portion
(generally not more than 20%) of the funds is invested in equity. So the
returns can be better than the normal debt mutual fund when the market
is rising. The typical returns in the last 3 years are 12% to 14% for
the top 5 funds.
However caution needs to be taken when choosing
the growth option. This is due to the fact that if we start to receive
the monthly payouts there may be months when the principal is used for
the payout. This will drain the fund particularly when the market goes
down.
Being largely a debt oriented mutual fund, the tax treatment is the same as the debt mutual fund.
Company Deposits
Companies
that offer deposit schemes to consumers tend to offer rates that are
in-between bank deposit rates and bank lending rates. This is a win-win
situation for the company and the person saving.
The bank has to
make a profit when borrowing from the public and lending to companies.
So they have an interest rate difference (spread) of about 4.5%. In
effect, the deposit holders are paid less and the borrowers are charged
more. When a company has direct access to the depositor, both benefit.
The depositor gets a better rate than what the bank can offer and the
company is able to borrow at a lesser rate when compared to a bank
interest rate.
However, it is in the best interest of the borrower
to do his research thoroughly and double check how good the credit
rating of the company is before investing. On an average estimates show
that one can easily get 11% - 12% on reputed companies' deposits for a 3
year term.
The returns will be taxed as interest and will have TDS.
Post Office Recurring Deposit
This
is a 5 year scheme where one invests on a monthly basis. However, there
does exist an option for the fund to be closed after 3 years, which
comes with a penalty of 1%. The advantage with the postal recurring
deposit over the bank recurring deposit is that the minimum monthly
investment is only Rs.10/- with no upper limit. In case the payment is
made once is 6 months or on a yearly basis, there are discounts for that
too.
The limitation is that the interest rate is fixed at 7.5% only and auto-debit to bank account is not available.
There are no tax benefits from the scheme. However Post Offices have not been deducting TDS.
Post Office Monthly Income Scheme
For
the retired people, the Post Office Monthly Income Scheme is a good
savings instrument. The interest is 8% divided on a monthly payout
basis. The payout if not required can be channeled to a recurring
deposit. The effective returns increases by almost 10% by doing this.
The
interest can be credited to a savings account of any bank too. The
account can be closed after 1 year with a 5% penalty and after 3 years
without any penalty. The limitation however is that the maximum
investment for any individual is only Rs.6 L.
The ranking of the
above 5 savings schemes have been done based on their returns, the
convenience factor to close and change to another savings scheme
(important when the interest rate is rising) and the safety for
investments. Of all the options the debt mutual funds appear to score
the highest due to their flexibility and returns. This is closely
followed by the mutual fund MIPs.
