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Wednesday, September 18, 2013

Look at fixed income in a choppy market – a guest post

Many investment experts, who regularly appear on business TV channels, suffer from herd mentality. When the stock market rallies, they jump on to the bull bandwagon and start predicting higher and higher index levels.

When the market corrects, the same experts suddenly turn gloom and doom mongers and predict ever lower levels. Since the stock market’s nature is to fluctuate, opposing views from the same set of experts tend to confuse small investors – who end up sitting on their hands.

In this month’s guest post, Nishit takes a look at some fixed income options that small investors can look at, without taking undue risks in a choppy stock market.

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Stock Markets are going crazy with wild swings. Government Securities funds, which trade mainly in Government 10 year paper, are swinging too. So, what are fixed income instruments one can invest in?

There are a slew of investment opportunities in fixed deposits from second tier companies like India Infoline and Muthoot. These are medium risk and high return investments. I would advise people to stay away from these, especially those who depend on fixed income for livelihood. In case of default they can lose the entire amount. For those who can afford to take the loss, a small amount can be invested.

Options are also available for Non Convertible Debenture (NCD) side of the market, which are not given much prominence but are lucrative. Older series L&T Finance NCDs are traded on the BSE. They are giving a yield of 10-10.5% (taxable) and pay interest twice a year. If one digs deeper one can find out other such investment opportunities.

There is one more lucrative option started by Government called Tax-Free bonds. These are bonds issued by PSU undertakings with tenures of 10 to 20 years. They give returns of 8.5-8.75% or so. The Interest earned from these bonds is tax free. Rs 1 lakh invested in say Hudco bonds - currently on offer - will yield you Rs 8760 tax-free every year. Now, if a bank FD at 10% gives you Rs 10000 for the same principal of Rs 1 lakh, then at highest tax bracket ( approx. tax of 30.9%), you would be left with only Rs 6910 after tax.

Effectively, if you are in the highest tax bracket, you are getting safe return equivalent to that of a 12.5% bank FD. So, what is the catch? None on the face of it. Since, the bonds are listed on the stock exchanges, one can get out whenever one wants to.

If all this doesn’t appeal to you, then you have the good old bank Fixed Deposits. Interest rates are attractive for tenures of just over a year. If one wants to invest in the market after the current volatility gets over that is another option.

Also, if one looks at Gilt funds, the 10 year yield is now at about 8.45%. If the new RBI Governor walks his talk, one can see a cooling off of interest rates after some time – which will increase 10 year yields. However, this option is only for patient investors.

Thus, even amongst market turbulence, there are investment options which are safe and low profile. Investing is all about being smart not flashy.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

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