Debt may continue to be a big draw

We are near the peak of the interest-rate cycle. True, no one can predict the timing of a slash in the benchmark rates. But, even if the rates start a downward movement, it will take some time before debt instruments become unattractive or the returns go to the six-seven per cent level. Result: this financial year, too, will see the rule of debt in the list of lucrative investment options. Short-term and ultra short-term debt mutual funds are earning around 9.3 per cent. Similarly, those in the income and liquid category are returning close to nine per cent. Click here for Cloud Computing Also Read Related Stories News Now - Independent Financial Advisors form national body - Equity mutual funds drop in March, outlook hazy - Taxation: Homi Mistry - Mutual funds lose Rs 36,000 cr of assets in FY12 - Don't panic when faced with tricky situations - Debt lining for equity cloud Fixed deposits are giving 9.25-9.5 per cent annually, on an average. The country’s largest lender, State Bank of India, offers 9.25 per cent for deposits maturing anywhere between one and 10 years. Some like Lakshmi Vilas Bank and Karur Vysya Bank are giving between 10 and 10.5 per cent for deposits maturing between one and two years. Last month, the government revised rates on small saving schemes by 0.5 per cent, to bring these at par with the rates offered by banks. Rates across maturities for the timely deposit were raised by 0.2-0.5 per cent. Post Office recurring deposit will now earn another 0.4 per cent, at 8.4 per cent. National Savings Schemes (five years and 10 years) and Public Provident Fund (PPF) will earn you 0.2 per cent more at 8.6, 8.9 and 8.8 per cent, respectively. The five-year Senior Citizens Savings Scheme will now give 9.3 per cent, as against nine per cent. Amid constant suggestions of parking money in debt, many risk-averse investors are getting confused between each of these instruments in terms of utility. As a result, they either end up putting money in smaller tenure schemes or lock it up for a longer tenure. Typically, fixed-income instruments are advisable for a maximum of two to three years, as predicting interest rates over this period are not as difficult as over, maybe, 8-10 years. For such longer tenure, you should look at equities to give a growth booster to your portfolio. At the time of choosing a fixed-income instrument, first decide your investment horizon. More important, locate the instrument that is more tax-efficient. For those looking at parking funds for a shorter time period (up to one year) short-term/ultra short-term debt mutual funds work better. One, because at present it is earning at par with fixed deposits and are also tax-efficient. Says Abhinav Angirish of InvestOnline.in: “FMPs (fixed maturity plans) are another option, as you get tax efficient returns (of over nine per cent) than deposits at a shorter time period.” Bank deposits should come into the picture only if you want guaranteed returns without any market fluctuation. And, if taxation is not an issue. As for tax efficiency, debt mutual funds are the most recommended option. “If your horizon is between one and two years and you fall in the highest tax bracket, you should opt for FMPs,” says certified financial planner Pankaj Mathpal. “For, those in the 10 per cent bracket or earning less than the basic exemption limit, can do good with fixed deposits.” You could invest in fixed deposits of that tenure too, for a higher return. But, if you take your tax liability into consideration, you will lose out on one-two per cent on the higher returns. Even while equities are the best performing asset class for long-term wealth creation, a smaller portion in fixed-income avenues is recommended. Like, varying across ages, 60 per cent in equities and 40 per cent in debt or 75 per cent in equities and the remaining in debt. Here, financial planners recommend 10-15 year instruments like non-convertible bonds or tax-free bonds. PPF is not suggested, as it is now market-linked and does not assure returns. Otherwise, it scores for being tax-exempt. Small saving schemes are out of favour, as even their revised returns are less than those of other instruments. And these are not even tax-efficient as their returns are taxable.