In 2017, benchmark indices skyrocketed by 30 percent and most of the mid & small-caps outperformed them by a wide margin. This attracted a lot of investors towards equities and fixed deposits took a backseat.
Well, one big reason for financialisation of savings was the return potential when compared to other investment options such as fixed deposits or real estate, gold etc.
Now, the interest rates are on the rise again. Recently, State Bank of India (SBI) and HDFC Bank have hiked interest rates for fixed deposits (FDs) below Rs 1 crore.
HDFC Bank is offering 7% for deposits below Rs 1 crore for tenures, from 1 year to 5 years, and SBI is offering an interest rate of 6.70% on FDs with maturity between one year and less than two years, up from 6.65% earlier.
The returns from FDs might be looking attractive but investors should not forget that income from fixed deposits is fully taxable. Hence, the effective returns are much lower.
If you are a risk-averse investor you would want to invest in fixed deposits but achieving the aim of capital protection is also possible in equities, suggest experts. If the investment horizon is 5-10 years, it is possible to safeguard wealth and earn decent returns which could beat FD returns by a wide margin and might, in fact, double your wealth.
For investors who want to play safe or with minimum risk, mutual funds are one of the safest ways to protect, suggest experts.
“If investors’ risk permits, balance funds can help investors conservatively in reaching the goal of Rs 1 crore in less than 10 years from Rs 50 lakh investment. If money compounds at 7.2 percent, investors can make Rs 1 crore in 10 yrs,” Hemang Jani, Head - advisory, Sharekhan by BNP Paribas told Moneycontrol.
“However, if money compounds at a high rate, hypothetically, say it compound at 10%, then investors can achieve a Rs 1-cr figure in 7.2 yrs. Over a longer period, equity has the potential to generate higher risk-adjusted returns. Balance fund index of last 10 yrs has delivered 10.34% returns, so there is a possibility to generate decent returns if good balance funds are selected,” he said.
However, investors should consider risk attributed to equities as there is no guarantee of returns, suggest experts. The selection of funds and tenure is important for safeguarding one investment.
“If the investment horizon is 5 years, it is possible to safeguard his wealth and earn decent returns using a combination of debt and equity. It would be possible to beat FD returns by a decent margin with the following asset allocation. 1) Dynamic Bond Fund: 50%, 2) Conservative Hybrid Fund 30 %, and 3) Balanced Advantage Fund: 20%,” Dr. VK Vijayakumar chief investment strategist at Geojit Financial Services told Moneycontrol.
“The rise in interest rates and a decline in inflows are only temporary. The present interest rate hike is not the beginning of a tightening cycle,” he said.
"Investors can also safeguard their wealth using debt funds and equities. Investors can look at putting money in FMP which is typically for 3+ years, and the other option is by investing the sum into an ultra-short-term fund and by the way of STP over the next three years, invest every month a fixed sum into hybrid conservative funds, suggest experts.
“To double investment in a period of 7-10 years. Investing in the Hybrid equity conservative fund may be looked at. Building the corpus in one of the well run hybrid schemes by way of STP from an ultra-short-term fund over a three year period and then allow these to grow would be a good idea,” Deepak Jasani, head –retail research at HDFC Securities told Moneycontrol.
“Combining a 7.5% return from ultra-short term fund for three years, and 10% return from a well-run hybrid equity conservative scheme (for 7 years) could result in Rs 1,000 investment ending up at ~Rs 2,400 after 10 years. The risk, in this case, is limited while returns are decent. The tax treatment is also better than that of a Company or Bank FD,” he said.
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