<> Play safe in these troubled times; invest in FDs, FMPs

Play safe in these troubled times; invest in FDs, FMPs
Investors should look at bank fixed deposits and fixed maturity plans of mutual funds which provide cushion and relatively risk free returns during these uncertain times. Financial planners say that fixed deposits could be of paramount importance to senior citizens or those with limited risk appetite.

In the case of debt avenues like fixed deposits, most public sector banks are offering 10 per cent for a 1-year fixed deposit, and 10.5 per cent in the case of senior citizens. And for a fixed deposit of say Rs 50, 000, the entire interest of Rs 5, 000 can be received without any TDS, if the depositor has a gross income of around Rs 1.5 lakh per annum. The FD holder would need to submit a tax declaration form 15 to the bank, to get his interest without TDS.

However, investors in higher tax brackets like 20 or 30 per cent, could see their returns come down to as low as 7 per cent. Of course, with inflation currently close to 12.5 per cent levels, this option may not help an investor keep up with the rising cost of inflation.

"The key aspect here is protection of an investor's savings, but the returns are modest," said Amar Pandit, director, My Financial Advisor.

Another debt investment avenue in vogue is fixed maturity plans launched by mutual funds. A majority of these FMPs invest solely in debt instruments, depending upon the tenure of the plan. However, financial planners highlight that FMPs become relevant especially to investors in the high tax bracket. That's because, funds give returns to their investors of FMPs in the form of dividends, which are subject to dividend distribution tax of 14 per cent. As a result, for investors in the higher tax bracket of 30 per cent, his net return via FMP is close to 8.6 per cent levels, better than a plain vanilla fixed deposit.

However, for those investors with a longer time horizon and with an appetite for risk, financial planners point out that it could be the right time to evaluate opportunities in the stock market or gold.

The 37 per cent dip in Sensex from its peak in January 08 provides attractive investment opportunities. That's because with the Sensex at 13,120 levels, it is currently trading at 16.5 times trailing P/E, well below the peak of 28.5 times in early January.

"Equities are the best option to grow one savings in the long term," said financial planner Kartik Jhaveri of Transcend Consulting.

To leverage opportunities in this space, investors could consider investing directly in the stock market or could leverage the professional investment services offered via mutual fund schemes.

Jhaveri points out that if one is investing directly, one could consider large cap stocks in sectors which offer growth opportunities over the next few years like telecom, healthcare or engineering sector. Investors could also leverage SIP schemes offered by mutual funds, which start at just Rs 1000 per month, typically for a three year period.

Another popular avenue in today's uncertain times is gold. Returns from gold depend upon the price at which one buys. In Thursday's trade, domestic gold prices posted their biggest intra-day rise in 27 years to Rs 12,915 levels per 10 gram.

However, despite the volatility in gold prices, this yellow metal has been a sound investment avenue during these uncertain times. For instance, gold ETFs have given a return of nearly 26 per cent since the beginning of calendar year 2008, the highest for any investment category, whether debt or equity linked funds.

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