All Investors can be classified into three major categories: conservative, aggressive or moderate. If a person is aggressive, he will generally go for equity investment because he wants to multiply his wealth in short period of time. And then there are others, who are very conservative investors who do not want to take any risk. They feel that theirs is hard-earned money and they can’t see it going down in value. They are happy with lower returns but they do not want to see any negative returns. So they generally go for fixed income options.
Here we are discussing fixed income options for conservative investors.
Real return matters
Conservative investors should look for inflation beating returns. Whatever fixed income option one considers, if it does not beat inflation then that means you are actually depleting your wealth, which nobody would like. It is a misconception to look at the absolute returns. Instead, investors should look at the real returns. The concept of real return is the returns being generated by your investment minus tax and minus inflation. If that is positive then only you are making real returns.
Let us take an example. If fixed income option gives you 10 per cent returns and you are in 30 per cent tax bracket that means after tax return is only 7 per cent and if inflation is at 8 per cent that means you are losing 1 per cent every year. This is how one should evaluate whatever returns they are getting from their fixed income option.
After reducing tax and adjusting for inflation, investment must earn at least 2 to 3% per annum. You cannot expect very high percentage because you have opted for fixed income option.
The most popular fixed income option is bank fixed deposits in our country. Apart from that we have all the post office schemes like Kisan Vikas Patra, Senior Citizen Saving Scheme, National Saving Certificates etc. But if the person is in high tax bracket then he will find that after paying tax he has not beaten inflation. So these schemes are only good for such conservative investors who are in low tax brackets or zero tax bracket.
If bank FD is giving you 9 per cent per annum interest and inflation is 8 per cent then you are still making 1 per cent real return if you don’t have to pay any tax.
But those who pay tax, they have to think of high returns investment options or different fixed income options like bonds, rated companies deposits/debentures, fixed maturity plans of mutual funds and short term and long term debt funds. These come with different features and need to be studied. As per your time horizon and your objective one should choose the best possible income options.
Not many people are aware that they can buy bonds of reputed and highly rated companies from secondary market. There are good deals available because those who wish to encash their bond holdings are ready to sell it at discount to fair value because of urgent need of money. There are financial services companies which provide quotes if you wish to buy bonds from secondary market.
So investors looking to maximise returns and still wanting to remain in fixed income options should consider buying bonds from the secondary market. Bonds can be bought in public offer but such public issuances are not available round the year and you may not get the option to buy from issuer every time of the year.
Deposit schemes of highly rated companies
There is a big range of company fixed deposits. There are many positive changes brought in the laws governing corporate FD after April 1, 2013. Rules have been made much more stringent now in favour of investors. Penalty for defaulting companies has been increased multi-fold.
Hence, the chances of default or delay are much less. If a company is unable to refund money on time, their directors can now be imprisoned also. Companies that are offering fixed deposits schemes now are trustworthy and highly rated. People can evaluate them and go for them. And here most of the companies, which are providing slightly better rate of returns are non-banking financial companies (NBFCs) or housing finance companies and some of them are very prominent names like HDFC, PNB Housing Finance, LIC Housing Finance, Mahindra & Mahindra Financial Services, Shri Ram Transport Finance.
These companies are offering rate of interest from 9% to 11% depending upon their rating and the period of deposit i.e. one year or five years and these schemes also offer regular returns. You can get interest in every three months, six months or if you are ready to wait for full one or three years cumulative schemes are also an option.
So fixed income investors should evaluate all the angles and choose accordingly.