THE interest rates are rising. It is good news for some - those who look at making deposits; bad news for some – those who are looking at taking loans. Savings however have to be channeled carefully so that the maximum can be gained from the deposits. Here are the top 5 savings instruments in a rising interest rate regime.
In today’s scenario the top 5 savings instruments are:
1. Debt Mutual Funds
2. Mutual Fund Monthly Income Plan – Growth Option
3. Company Deposits
4. Post Office Recurring Deposit
5. Post Office Monthly Income Scheme
Debt Mutual Funds
These are managed funds that invest the funds from the investors predominantly in debt and debt oriented schemes.
There are a number of advantages that these mutual funds give compared to a direct deposit. The most apparent is the fact that this is a managed fund and the returns can be better as the manager has access to more information and will leverage that compared to individual investors. There is no TDS or tax on the interest. The returns will be processed as capital gains.
Returns from this fund are expected to be good. The top five debt mutual funds have given compounded returns in the range of 10.50-14.50% in the last 3 years. This is much better than the normal bank deposit or company deposit. The advantage is that debt mutual funds can create capital gains when the interest rates go down.
Mutual Fund Monthly Income Plan – Growth Option
For people who have a higher risk quoitent during the short term, monthly income plan (MIP) of mutual funds is good. Here a small portion (generally not more than 20%) of the funds is invested in equity. So the returns can be better than the normal debt mutual fund when the market is rising. The typical returns in the last 3 years are 12% to 14% for the top 5 funds.
However caution needs to be taken when choosing the growth option. This is due to the fact that if we start to receive the monthly payouts there may be months when the principal is used for the payout. This will drain the fund particularly when the market goes down.
Being largely a debt oriented mutual fund, the tax treatment is the same as the debt mutual fund.
Must read: Reader Raghu's MF portfolio REVIEWED!
Company Deposits
Companies that offer deposit schemes to consumers tend to offer rates that are in-between bank deposit rates and bank lending rates. This is a win-win situation for the company and the person saving.
The bank has to make a profit when borrowing from the public and lending to companies. So they have an interest rate difference (spread) of about 4.5%. In effect, the deposit holders are paid less and the borrowers are charged more. When a company has direct access to the depositor, both benefit. The depositor gets a better rate than what the bank can offer and the company is able to borrow at a lesser rate when compared to a bank interest rate.
However, it is in the best interest of the borrower to do his research thoroughly and double check how good the credit rating of the company is before investing. On an average estimates show that one can easily get 11% - 12% on reputed companies’ deposits for a 3 year term.
The returns will be taxed as interest and will have TDS.
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