Hello Readers!!
We are in the second wave of the COVID-19 pandemic, the crisis continues and its impact on the market continues. In all this scenario, the interest rate has also been hit.
If we talk back about the early 2000s, the economy of India was growing at lightning-fast speed, the interest rates were 12-14 percent. While the economy and market have been hardly hit by the COVID-19 crisis in the current situation, the interest rates are trending down to 4-5 percent and our growth has also slowed down drastically.
Basically, it’s hard to predict for any that when will the individuals again be able to get double-digit interest rate from fixed deposits (FDs) or other fixed interest-bearing instruments. In such a scenario, it is hard for an individual to decide whether they should wait for the interest rates to rise or look towards investing at the same rates or looking towards exploring some other good fixed interest-bearing instruments?
Broadly, fixed income instruments are divided into government tax saving schemes (PF, PPF, SCSS, etc.), bonds (Corporate and tax-free bonds by RBI), and FDs/RDs with banks and NBFCs. Let’s look at each of these in greater detail.
Government Tax Savings Schemes!!
Tax saving schemes offered by the government can be compared based on four different parameters: interest rates, lock-in, taxation, and withdrawal during an emergency. Ironically across all of these four parameters, one scheme is the clear winner: EPF/VPF, with interest rates of 8.50 percent. Since EPF has an upper cap of 2.5 lakhs for tax benefits, we would advise you to maximize your contributions in this avenue.
After VPF, we would strongly advise you to look at RBI tax-saver bonds. The best part about these bonds is the floating interest rate – the rate is pegged to the National Savings Certificate rate, which is 6.80 percent currently.
NSC’s rates are again linked to the repo rate, which means as and when the repo rate rises the bonds will start offering higher interest. However, there is no guarantee of whether the repo rate should fall from the current levels or not.
While the above-recommended instruments work well for an average investor, we also suggest an individual look toward debt mutual funds that offer a good interest rate on returns, help save on taxes, and the most important most efficient when it comes to withdrawal during an emergency. The best option among all the debt schemes is the liquid funds that offer all the facilities mentioned above.
Some Exposure To Equities!!
To invest in equities, you could start by defining your risk appetite and start very small, with a SIP in one of the index funds. Equities will give you both diversification and wealth creation opportunities (Sensex has consistently yielded a CAGR of 10 percent in the last 10, 20, and 30 years, as of April 2021).
Honestly, there are clear signals all around that risk-free investments are losing yields consistently. Treat this as a hint and start investing in equity.
Let Us Conclude!!
In this low-interest regime, get all of your loans repriced! Either ask your bank to reduce your existing loan rates or get them refinanced through some other bank (easier said than done). Think about it and soon, as a new home loan is available at 7 percent; if you’re paying anything higher than that, you are at a loss. Even a couple of percentage points’ reduction in your loan rates will result in massive savings over time.
Keep reading our articles for more updates on finance and investment!!
For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).