FDs, FMPs can be safe investments in troubled times

Since January 08 the share market is very unstable therefore the financial expert’s advice to invest in bank’s fixed deposits (FDs) and fixed maturity plans of mutual funds (FMPs). FDs and FMPs provide cushion and relatively risk free returns. According to financial planners the fixed deposits can have dominant importance to senior citizens or those with limited risk factor.

In the case of debt possibilities such as fixed deposits, at present most public sector and private 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 taken without any TDS, in case the depositor has a gross income of around Rs 1.5 lakh per annum. The FD holder would be required to submit a tax declaration form 15 to the bank, to get his interest without TDS.

But, investors coming under the higher tax brackets like 20 or 30 per cent, possibly will see their returns come down to as low as 7 per cent. Certainly, with inflation currently close to 12.5 per cent levels, FD option might not be of help for an investor to 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.

Then in debt investment avenue fixed maturity plans launched by mutual funds is in trends. A majority of these FMPs do investments solely in debt instruments, in accordance to the tenure of the plan. According to financial planners FMPs are relevant especially for the investors in the high tax bracket 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. Thus, for investors in the higher tax bracket of 30 per cent, their net return via FMP is close to 8.6 per cent levels, which is much better than a plain vanilla fixed deposit.

But, for the investors with a longer time prospects and can face risk factors, financial planners indicate that it can be the right time to assess opportunities in the stock market or gold.

Since January 08 there has been 37 per cent dip in Sensex from its peak therefore this is the right time to avail such investment opportunities. As for 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 avail opportunities in this space, investors can consider investing directly in the stock market or could leverage the professional investment services offered via mutual fund schemes.

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

Then investing in gold is another popular area in today's uncertain times. But returns from gold wholly depend upon the price at which one buys. For instance 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 instability in gold prices, it is considered 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, this is the highest for any investment category, whether debt or equity linked funds.