Investing in Fixed Deposits - Banks

Investing in Fixed Deposits - Banks

Source - Team Crawfin/ Harshal Jawale, CFP^CM

 

Most investors today are refraining to invest into equities and are looking to increase exposure to fixed deposits. Though it is sensible to lock in surplus funds at higher interest rate which may be just peaking out, here we lists few things that you must know before investing into fixed income options –

1. Fixed deposits are not completely safe

Before this recession investors used to think that fixed deposits are the safest option. Banks all over the world of all sizes when forced to shut down, we realized that even FDs are not safe. In fact when banks go bust we may even loose principal amount (forget returns).  In India we may not have faced such situation (thanks to RBI) except some co-operative banks but then such situation always come as a surprise. We also have Deposit Insurance and Credit Guarantee Corporation (DICGC) that insures deposits of up to Rs 1 lakh per customer across all branches of a particular bank.

2. Premature withdrawal attracts penalty

We often tend to book FD for higher duration because it offers 25-50 bps (0.25%-0.5%) extra. But we also need to note that if we happen to break FD before maturity then bank usually slap 100 bps penalty lowering our effective return. So most advisors recommend us to book FD for shorter duration and then renew. We disagree with this, as it may sound fit in theory but in practice it doesn’t work. We always recommend our investors to book FD for 3-5 years (tenure that offer highest interest rate). This is a tenure where usually investor has clear idea of his fund requirement plus we often seen that money just lies into saving account for many months. Instead we believe it is better to book FD for higher duration and then be ready to break FD if need arises. This also ensures higher interest rate earned which may not be available at the time of renewal.

3. TDS is just an interim tax

As per present income tax guidelines, banks are required to deduct tax at source (TDS) on deposits if the total interest earned on all your fixed deposits in a bank is more than Rs.10,000 in a financial year. However, the depositors can claim the credit for such TDS in their income tax returns.

In case of resident individual and HUF, for a payments upto Rs. 10 lacs, TDS is  deducted at a rate of 10.3% (including education cess). But this is not the complete tax liability against the returns earned. We need to include this interest income into our total income and pay tax according to our tax bracket. So if you fall in 30% tax bracket i.e. total income above INR 10 lakh/pa then you must pay remaining 20% (tax liability-TDS) tax amount before tax filling every year.

4.       Form 15G & 15H

The form 15G and 15H are submitted to banks by depositors who DO NOT want TDS be deducted from their interest earned on fixed deposits.  A person who is below 65 years can file the Form 15 G. In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:

§  The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil; and

§  The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab

A person of 65 years or more is eligible to file Form 15 H This form can be submitted by senior citizen only if tax on estimated income of the senior citizen is NIL.

5.       Flexi Fixed Deposit

Flexi-deposits are similar to savings accounts. The only difference is that on the basis of your regular cash needs, you could set a limit and instruct the bank to transfer the balance of your idle money to the term deposit.

This may be the best option to park funds as it provides liquidity plus term deposit interest rate. But they fail to realize that the term deposit rate which never shown clearly by the banks is actually rate for 90 days which is often 5%.  According to us it is still a good product but only for short term where liquidity is preferred over return. This cannot be replacement to fixed deposit.

          “Wealthy Investment needs Healthy Methods”

NHAI/ PFC – Tax Free bonds

Team CrawFin/ Harshal Jawale, CFP^CM

Nav-Ratna Government companies offering tax free bonds (on interest) to resident individuals, NRIs and corporate; offers excellent opportunity to park cash in safe mode.

Features of Tax Free Bonds ---

1. Tax benefits u/s 10 clause (15) of the Income Tax Act, 1961 – the interest received on such bonds are tax free in nature.
2. Credit Rating(s) of CRISIL AAA/Stable, CARE AAA & FITCH AAA (ind)/Stable for existing outstanding bonds. Instruments with this rating are considered to have the highest degree of safety in terms of timely servicing of financial obligations.
3. Bonds to be allotted on first-cum-first serve basis up to the issue size of relevant tranches
4. Bonds are to be issued either in demat form or physical form at the option of bondholders. Bonds are proposed to be listed on the BSE and the NSE. (PFC will be listed only on BSE)

Issue Details

Face value/bond = INR 1000

Minimum Application Size = INR 50000 i.e. 50 bonds (For PFC Min app size = INR 10,000)

Type of bond = Tax Free Secured Redeemable Non-Convertible Bonds in the nature of Debentures

Tenure = 10 years and 15 years

Interest rate = 8.2% (10 yrs) & 8.3% (15yrs)

Interest payment = Annual

Issue opens on = December 28, 2011 (For PFC December 30, 2011)

Issue closes on = January 12, 2012 (For PFC January 16, 2012)

These bonds are highly recommended for people who pay tax on Bank Fix deposits.

Do you know – HDFC Ltd offers 10% interest on its platinum fixed deposit. For more details read http://crawfin.blogspot.com/2011/10/hdfc-platinum-deposits-10-pa.html

HDFC Platinum Deposits @10% pa

HDFC Platinum Deposits – 3 Decades of excellence

Team CrawFin/Harshal Jawale, CFP^CM

With consistent performance for over three decades, HDFC Ltd. has earned its credibility from over 10 lakh depositors.

Interest Rates – 9.5 -10% for Individuals, 0.25% extra for Senior Citizens

Minimum Amount – INR 20,000

Duration – 15, 33, 60 months

Options ---

1. Monthly Income Plan - monthly interest payout
2. Non-Cumulative Plan – quarterly/ half yearly
3. Annual Income Plan – yearly
4. Cumulative Plan – lump sum

Best Option – Platinum Cumulative option for 15 months with 10%/pa Interest rate.

Depositor can benefit from -

1.             Highest Safety - AAA rating from both CRISIL and ICRA for 17 consecutive years
2.             Attractive & Assured Returns
3.             A wide range of deposits products to choose from
4.             Quick Loan against Deposit facility

Resident Individual Investors ---

Depositors can choose from a wide range of deposit products with maturities ranging from 12 to 60 months at competitive rates of interest and with different features to suit the investment needs of individuals. Senior citizens who are 60 years and above are offered an additional 0.25% p.a. on all deposit products

NRIs ---

Deposits from Non-Resident Indians and Persons of Indian Origin resident outside India holding PIO Card are accepted in accordance with the regulations governing the acceptance of deposits from NRIs. Depositors can choose from a wide range of deposit products with maturities ranging from 12 to 36 months at competitive rates of interest and with different features to suit investment needs of individuals. Senior citizens who are 60 years and above are offered an additional interest of 0.25% p.a. on all deposit products

Our Assessment –

With HDFC Ltd track record, its rating and interest offering at 10% is very attractive as against any bank deposit (9.25-9.6%) as on date. Only Company Fixed deposits are offering higher interest in the range of 10.75-12%/pa today with higher interest with high risks.

We recommend strong buy on HDFC Platinum deposits instead of any bank FD or PPF investments for some time i.e. as long as high interest remains.

NCDs - Flavor of season

Team CrawFin/ Harshal Jawale, CFP^CM

Debt instruments have become the flavor of the season, Bank fixed deposits, company fixed deposits and now a flurry of non-convertible debenture issues all of these are offering handsome returns, given the high interest rate regime.

NCDs are issued by NBFC’s to raise money from public, it cannot be converted into stock and carries high interest rate. Within two months we had Shriram Transport Finance NCD, IIIFL NCD, Mannapuram Finance NCD, Mutdhoot Finance NCD and now Religare NCD is open for subscription. They carried interest rate of 12-12.5% per year with tenure upto 3-5 year.

NCDs can be Secured or Unsecured, most NCDs issued recently were secured meaning were covered by assets they own. In case of default such assets will be sold off to pay money to debenture holders. Please note debenture holders are preferred to make repayments over shareholders in case of bankruptcy of a company. Hence it is considered as safe instrument than equity.

NCDs are also listed on stock exchanges after the bond has been allotted to you. They trade like any other stock, and you can buy and sell them from the stock exchange at that time. You have to pay a premium or get a discount based on the market conditions at the time; this doesn’t affect how much interest you get paid annually. But trading in NCD is yet to pick up as purchasers are usually long term investors.

Interest income from NCDs is taxed similar to FDs at normal rates i.e. as per the tax slab of applicant by including it in “Income from other sources”.

If you sell NCD on stock exchange before maturity at premium/discount then capital gain/loss arises out of it and is subject to capital gains tax. While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. Also note that there is no tax deduction at source (TDS) from any securities issued by a company in a dematerialized form and listed on a recognized stock exchange in India.

Ratings, Company financials, Track record of raising money are several other factors that must be kept in mind before investing into NCD. It is always advisable to wait for large corporate offer via any debt instrument (NCD/Bonds) in exchange of 1-2% forgone interest. SBI, IFCI, Tata Capital, L&T Finance, Tata Motor, M&M Finance, Godrej have raised money in last couple of years.  

If you have a surplus and are willing to take a little more risk for that additional one per cent return, you can consider investing into NCDs, but hold till maturity. Higher interest rate regime in India is likely to turn around in next few RBI meetings.

“Wealthy Investments need Healthy Methods”