BOMBAY, 24 December — The interest rates are falling worldwide, bullion is stagnating, real estate is risky and the stock markets continue to remain a roller coaster ride. So where does one park their monies? India’s leading non-banking financial company, Sundaram Finance, has cut the coupon rates on its fixed deposit and cumulative deposit programs. So, too, have many public sector banks such as Bank of India and Bank of Baroda.
The decline in coupon rates has more to do with the excessive liquidity in the system. In addition, the attractiveness of post office schemes has also declined, though they continue to offer superior risk-adjusted returns.
The biggest question doing the rounds is — is this fall in coupon rates temporary? Actually, no. Given by the current Indian economic scenario, wherein industrial growth has declined and exports are also low, there just does not seem to be enough to trigger any increase in credit offtake in the short-term. There is liquidity, infact excess liquidity but it is just that investors do not want to invest.
As such, the outlook does not look bright for a reversal of the decline in interest rates. And what does one do then in such a situation? Analysts say that investors should not hold back their investments and continue to remain invested. But they should now stay invested in a diversified array of investment options. Apart from keeping the basic required money in the bank to tide over possible emergencies, investors should now deter from keeping all their surplus money parked in savings accounts. The low interest rates do not really look enticing. But what does look enticing is mutual funds.
Contrary to what many may think, the Indian mutual funds continue to attract investors, especially now in this regime of uncertainty and lower interest rates. In the month of November, post the Sept. 11 attacks and the tumbling stock indices, the mutual fund industry saw a marked change in fortunes as it saw net inflows of Rs.18.18 billion.
The Unit Trust of India continued to be subject to net outflows, though the quantum was less than that seen in October. Private sector funds saw an overall inflow of Rs.16.83 billion which was a 33 percent improvement over the net inflow position of October.
But then, if an investor decides to invest in mutual fund, how does he go about deciding which one is best suited for his pockets? Just as there are various creams and lotions for different skin types, there are different types of options which one can go for in mutual funds. Those who have large risk appetite may go in for equity-based or sectoral schemes. Balanced schemes are designed for those with a smaller risk appetite whereas those who would like to have safety above all the other considerations, should have pure-debt schemes. And in the current scenario, one should always go for open ended funds as exit and entry is based on the choice of the investor and not the fund.
In the case of mutual fund income schemes, the term to maturity of the portfolio keeps fluctuating. The portfolio manager changes the term to maturity in accordance with the prevailing interest rate scenario at that point in time. Such active strategies can maximize returns without enhancing the risk involved significantly.
Be it any kind of fund — equity, balanced or debt, they all offer the options of schemes with regular dividend, schemes which reinvests the dividend and schemes which give the growth option.
Under the first option, the investor gets lured in by the term "dividend" not realizing that he will not be able to get much as the tax man will also have his share of the pie. Under the "reinvestment" option, investors get attracted to the bait of tax free dividend but does not get anything in the hand as it is reinvested. The best part is that the tax is not really avoided as the mutual fund first pays the dividend tax to the exchequer and reinvests the remainder of the amount.
The best is the growth option as here the Fund does not pay any dividend and hence one does not have to shell out any tax. The income is earned by way of capital gains arising out of increase in the net asset value ( NAV).
Investing in mutual funds has become as easy as operating a bank account.
Given the open ended nature of the funds, one can deposit and withdraw at will and you can have the option to give instructions to the Fund for monthly payments. After investing monies in other options and after making contributions to tax-saving devices like PPF which slash tax on your current income, invest all the remaining funds in the right mutual funds.
Overall, the exposure to mutual fund income schemes and other fixed income investments could provide a degree of balance to the portfolio, especially given the uncertain interest rate environment.
