Dr. Sanjiv Agarwal

Volatility in the stock markets discourage the investors to invest in stocks and equities which is otherwise considered lucrative, given the capital appreciation it commands and the tax free dividend it yields. Investments   in stocks is, however, not every body’s cup of tea as it requires a lot of market study, research on stocks and a game of timing the entry and exit. In short, stocks are best for professional investors. While mutual funds do provide a safe haven for small and retail investors, their under-performance and lack of guaranteed returns demotivate the investors to stay invested in mutual fund schemes. The only option investors are left with is debt instruments i.e., where the investment is in a debt security repayable as per terms of the instrument and returns are offered in the form of fixed or floating interest rates. On risk matrix, if secured, these are safe as principal amount remains intact and returns are known and fixed, free from volatility.

Now a days, even debt instruments come with varying interest or return options. With volatility in interest rates, it is increasingly becoming difficult to invest blindly in any debt instrument. One needs to invest wisely keeping time horizon, tax angle and return or yield in mind. The debt market scenario now offers a plenty of options in the form of Government securities, bank’s fixed deposits and other deposit plans, corporate bonds and securities, company fixed deposits and debt mutual funds. Not only this, tax free bonds are also available where interest earned is also tax free and like dividend income, such interest is not subjected to levy of income tax. Otherwise interest income is liable to charge of income tax.

Public provident fund offers tax free interest and interest yield currently is 8.7%, is safe as it is backed by Government, is reasonably liquid as withdrawals are permitted and is fully tax free – withdrawals, maturity amount as well as interest income. Since the term is for either 10 or 15 years, one can start early for PPF. Tax free bonds such as those issued by HUDCO, NHB, NHAI etc. also offer tax free yield of around 8.5 -9 percent, are credit rated, generally safe being issued by public sector companies, provide liquidity through stock exchange listing and are good for high net worth investors. However, such bonds suffer from capital gain tax.

Interest earned on bank fixed deposits, debentures of companies and corporate fixed deposits is taxable but bank deposits enjoy high safety. While the bank’s returns range between 8.5% – 9%, post tax yield is 20% to 30% lower. Company deposits may yield more returns of about 9-12%, but these are relatively less safe, though a good credit rating may provide some comfort.

Company deposit are ideal for those investors who can take risks for higher return and track the companies and their promoters closely. These also offer a lower flexibility, liquidity and high taxation.

Keeping in view all the pros and cons of investing in fixed income securities, one needs to have a mix of debt, equity and other assets in the portfolio. Within debt, with changing times, lot of variety is available which needs to be harnessed.

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