Non-risky options: Time for fresh guard

In the last few months, the bankers and the government have been in a tussle over interest rate scenario with the former refusing to soften the interest rate in a big way.

The softening approach has been more on the deposit front and loan rates haven't really come down in a hurry for the borrowers. For instance, SBI's home loan offer of 8 per cent interest for a select period of loan is the only hot product for home loan seekers.

Other banks continue to carry a loan price tag of 9-9.5 per cent and for most borrowers loan has once again become a tough sourcing option.

Tax efficient options:

On the investment side, debt is beginning to look unattractive, as the yield has been slipping in the last couple of quarters. The returns from one-year old bank deposits has come down to 6-6.5 per cent, and if you one takes into account the tax component, the yield comes closer to the savings bank returns.

Hence, it has become a necessity for investors to look for tax efficient options besides the rack rate. Or else, one will have to allocate the amount in a smart way to bring down the tax component, but such luxury may not be available for all. On the other hand, look for some alternative options for your non-risk portfolio.

MIPs of mutual funds:

The revival of mood in equity markets has once again altered the outlook for monthly income plans of mutual funds. Since these funds allocate their corpus to equity ranging from 10-30 per cent, they have been able to deliver double-digit returns once again.

While the outlook for equity market over the next 2-3 years has turned positive, the added advantage of MIP is the tax efficiency, as the returns (long term capital gains) are taxed at 10 per cent (without indexation benefit) unlike fixed deposits, which are taxed according to the tax slab of individual.

For those in the higher bracket of 30 per cent tax, the difference could be substantial. The only disadvantage with MIPs is that they carry element of risk, but one can look at them in the current environment, if the money can be parked for more than one year.

It may not be the best option for senior citizens dependent on regular cash flow. However, such individuals can park a portion of their corpus and can look at the option of dividend payouts on quarterly or half-yearly.

Floating interest rate:

This could be an alternative as the yield from the product is better than some of the short-term options like treasury plans. While interest rates in general are expected to move downwards, the liquidity sapping exercise of governments across the globe will keep them from slipping down drastically. It is not a bad idea to allocate a portion of your short-term corpus for the same.

G-Secs as option:

Gilt funds are looking riskier than equity at regular intervals because of government's aggressive borrowing. Not only has it sucked the liquidity from the system, but has also kept rate cuts at bay. The rising inflation and the signs of recovery on the economy could kick-in softer interest rates. Aggressive debt investors could probably take a call on gilt funds though it is not a safe option.

Changing debt scene:

• FD rates have slipped to 6 per cent range

• Treasury plans are no more attractive

• MIPs can be considered for over one-year corpus

• FDs are less attractive because of taxation and lower interest rates

Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment-consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuisances of Finance, which has attained a new look over the years. Besides being a columnist, Srikala has also been closely associated with some of the prestigious book projects.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com.

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