Where to Invest when interest rates
are falling...
by Rajeev Pathak
In recent times,
interest rates have declined substantially and this has disrupted the Retirement
plans of many of our senior friends. The fall in interest rate is so much that
monthly interest income has been reduced by more than 25% in many cases. This
shortfall in earnings has created big havoc on people who are dependent on
interest income for livelihood. To their misfortune, it is not the end of
declining interest rates, Govt. and business sector, are after RBI to
reduce rates further.
The declining Rate of interest
is not the only culprit, sudden price-rise of essentials like vegetables,
pulses, and sugar, administered price-rise due to increased GST load, withdrawal
of subsidy on essentials like LPG, deregulated the price of petroleum products are
further going to increase the miseries of salaried and pensioners.
In this scenario, it has
become all the most necessary that we find out some new avenues to invest our
hard-earned money of whole life. While thinking on the subject, the following
important objectives come to my mind:
I.
My capital must be protected,
II.
It should beat the inflation,
III.
Better if my investment gets appreciated over the long run
IV.
Adequate liquidity is also needed and
V.
Last, but not least, it may be
tax-efficient.
Considering the above
objectives, I have examined several financial products and came to the conclusion
that Balanced Funds can fulfill my selection criteria. Now, let us discuss how
and why.
What is a Balanced Fund:
A Balanced Fund is also
termed a hybrid fund. As the name suggests, they invest in a combination of
Equity, Bonds, and in some cases in Money Market instruments. The equity component
may range from 60%-85% of the total portfolio, depending upon the investment philosophy
of a particular fund, and prevailing market conditions, but the exposure limit to
equity is pre-determined. While the equity component provides high growth opportunities, the bond component protects
the returns from any downside and volatility. A high rate of dividends from blue-chip companies and fixed income from
bonds component help the fund to
generate regular returns. Both these components also help the fund to appreciate.
As the major component is
invested in equity, it takes care of rising inflation.
With the emergence of
technology and online platform, investment can be redeemed with a lot of ease, and the amount gets credited within T+ 4 days. Thus, the liquidity aspect is
taken care of reasonably.
The interest income from Fixed
Deposits is taxed at a normal rate. In the case of mutual funds Dividend income from an equity-oriented mutual fund, the scheme is tax-free. To qualify as an equity-oriented
mutual fund scheme as per tax laws, it should have a portfolio with a minimum of 65%
holding in shares of domestic companies.
On redemption, proceeds from
mutual funds are treated as Short Term or Long Term Capital Gains. In the case of
equity-oriented mutual fund schemes, any
redemption made after the minimum holding period of 1 year is treated as long-term
and tax-free. In the case of Debt Funds, holding for a minimum period of 3 years is
treated as long-term capital gain and
taxed @ 20% with indexation benefit for calculating the cost. It reduces tax
liability to great extent. So, while investing in a Balanced Fund, it should be
ascertained that it invests a minimum of 65% in equity and qualify for tax benefits
available for equity-oriented schemes.
Which Fund is the best?
Though past performance of
any mutual fund scheme is not a guarantee for the future, yet there are several
funds that have given a return in the range of 12- 15% or even more and there
are laggards as well. The suitability of a mutual fund scheme for an individual
depends on many factors like his/her age, investment horizon, financial goal
and its cost at a future date, risk appetite, etc. Therefore, investors will be
well-advised to consult their Financial
Adviser or send me an email with full details for a customized solution.
Disclaimer
Mutual
Fund investments are subject to market risks, read all scheme related documents
carefully. Past performance may or may not be sustained in the future.
boirajeev@gmail.com
Very good investment information
ReplyDeleteThanks, Dear Amit.
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