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Take advantage of high interest rates

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Take advantage of high interest rates Act now

After the RBI action on 15th July 2013, Interest rates in the financial markets have shot up significantly and the money supply into the Indian Financial System has been reduced significantly. In this scenario the interest rates have really hit through the roof on fixed income products. This Article “take Advantage of high interest rates Act now” takes a look at the 5 investment options where an investor can put in his money and take advantage of the high interest rates.

Tax free Bonds

Tax free bonds from Government Enterprises  like IIFCL, IRFC, NHAI, REC, PFC, HUDCO NHB etc are expected to hit the market during starting September 2013. The total amount of money that these tax free bonds are expected to raise is to the tune of Rs 48,000/= Crores. The yield (rate of interest) on these bonds is linked to the average yield of Govt Securities of similar maturities. These tax free bonds are issued for an average tenure of between 10 years to 15 years. The benchmark 10 year G – Sec has remained in the region of 8.50% to 9% in the last 15 dyas.

These PFIs can offer a yield of 55 Basis points (.55%) lower than the G-sec yield of a corresponding maturity to retail investors and 80 basis points lower for other category of investors. A retail investor (individual, NRI, HUF) in this case would be one who can invest up to Rs 10 lacs in all the series of a particular tranche. Which means if one was to invest a larger chunk; can invest in one tranche of one company and other tranche of the other company and still qualify as a retail investor.

If the benchmark rate remains in the region of 9% would mean that Retail investors can earn a significantly high interest rates of 8.45% and other category of investors can also earn a tax free return of 8.20% with the tax free advantage. However this is the upper limit for the ROI and if the company wants they can issue these tax free bonds at a lower rate, depending upon the demand for such tax free instruments in the market.

The biggest attraction of these bonds remains the tax free interest. Unlike any other interest bearing instrument currently available in the market. The Pre tax rate is even higher which can be calculated as ROI/.70% and would be significantly higher than any other comparable instrument available in the market. This is a good option for retired individuals to lock – in the money for a longer term on tax free basis. And specially important for retirement planning for retired people

The investors can also sell these bonds in the secondary market and book profits if the yield in the market come down, which is quite likely in the current scenario.

Non-Convertible debentures

The era of ninety’s is back. Lot of companies have lined for issuing redeemable non-convertible debentures. The rate of interest on such debentures is also ranging from 10.50% to 11.75% depending upon the company and the credit ratings of the company. Currently Srei Infra Finance is in the market with its public issue of secure non-convertible debentures and offering a rate of interest up to 11.75%, which is quite high. Srei Infra offers investors the opportunity to double your money in 6 years 3 months.

Fixed Maturity Plans or Fixed Term Plans

It’s the time to invest in Fixed Maturity Plans / Fixed term plans, as recent increase in the interest rates gives an opportunity to invest money in fixed term plans. Almost every second day there is a fixed maturity plan or Fixed term plans launched one fund or the other. Fixed horizon fund or a fixed maturity plan is an open ended scheme of a mutual fund in a closed format. Which means though an investor has the option of withdrawing the funds by paying a certain amount of exit load, but if stayed invested then can earn the portfolio return minus the expenses chargeable to such funds. These funds are for a variety of maturities ranging from 1 month, 3 months, 6 months 1 year and 3 years. The portfolio return on such funds is ranging from 10% 11%. Also for retail investors there is a tax arbitrage available.

Liquid Funds

If you keep a substantial amount of money in a bank saving bank account then parking that money in a liquid funds really makes sense these days. If you look at the last one month return Then the category average is 10.63% for Liquid Fund and 10.68% for Ultra Short term fund (As on 5th September, 2013). This is significantly high compared to a savings bank interest rate. Also there is a tax advantage for the retail category of investors.

Bond Funds / Income Funds

High interest rates secnario

Booster to returns on your portfolio

Investors willing to take some interest rate risk can also look at taking some exposure in Bond Funds or also popularly called as the income funds. Bond funds invest investors money into fixed income securities issued by public or private corporate. To diversify they also invest part of the money in Govt of India Securities.The advantage of investing in Bond funds is when the interest rates go down the securities with high interest rates appreciate. Which means the investors can also expect some capital appreciation on the portfolio; besides earning the coupon yield of such securities. However on the contrary if the interest rates rise then an investor stand to loose the money, because the securities with a lesser coupon would depreciate in value and and a resultant loss to the investor. However if the interest rates remain steady then the investor can look at earning the portfolio yield minus expenses from such funds. There are fund houses who have bond funds investing only in PSU Banks / Banks, or triple AAA rated corporate etc. Portfolio yield on these funds is as high as 10.50% compared to bank interest rates. Dividend from Bond Funds are also tax free, however the fund house pays a dividend distribution tax before declaring the dividend.

How long would this High Interest Rates Scenario

Govt for long has maintained the view that interest rates should come down to boost the sluggish economy. With the new RBI Governor coming in, we might look at the idea of high interest rates moving southwards taking shape. Also the high interest rates are a dampener on the Economy and for economy to grow the interest rates are bound to come down. The high interest rates scenario has existed for almost 2.5 years now and doesn’t look like ending anytime soon.

Disclaimer:The contents of this article aren’t intended to serve as professional advice or guidance and the publisher takes no responsibility or liability, express or implied, whatsoever for any investment decisions made or taken by the readers of this Article based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Article. the article is meant for general reading purposes only and is not meant to serve as a professional guide for investors.