In an environment of falling interest rates, how does one manage higher returns from regular income investments while keeping risks within check? Here’s a strategy.
If there’s any regular income option that is safer than bank deposits, it is the India Post’s small savings schemes, which are direct borrowings by the Government of India.
The interest rates on small savings instruments are reset at the beginning of every quarter by the government. But they’ve not been revised for a while now and are therefore well above market interest rates. Regular income investors should lock into the high rates on these ultra-safe instruments.
Investors who are not senior citizens can consider the Post Office Monthly Income Scheme which currently pays an interest of 7.7% per annum, credited monthly to your account. The scheme caps the total investment an individual can make at ₹4.5 lakh, but if you open a joint account, that can be doubled to ₹9 lakh. The scheme matures at the end of five years. It earns no tax benefits either on the initial investment or on interest but suffers no TDS.
The Senior Citizens Savings Scheme, with an 8.7% annual interest rate, presently offers the best deal among regular income options to those who are 60-plus. The scheme caps individual deposits at ₹15 lakh, but by investing jointly you can invest upto ₹30 lakh. It has a five-year term and can be extended at maturity.
Remember that the rates mentioned above apply only for investments made in the April 1 to June 30 quarter, after which a cut is quite likely. Do maximise your investments in these schemes before June 30 to make the most of this opportunity.
Established PSU banks don’t offer you the best interest rates. To earn higher interest on fixed deposits, you may have to open accounts with regional banks or small finance banks both of which are well-regulated by the RBI. They are also covered by deposit insurance, making them safer than company or NBFC FDs.
To cite some instances, Equitas Bank presently offers 8.55% for two to three-year FDs and Suryoday Bank offers 8.75% to 9% for similar terms. Rates are higher by 0.50-0.75% for senior citizens. Most of these banks offer options to receive interest on a quarterly or monthly basis, with slight variations in the interest rate.
However, do not get carried away by these mouth-watering interest rates to shift all your fixed income investments to small finance banks. Though they are regulated, they are in a position to offer higher rates mainly because they lend to riskier segments of small borrowers. Therefore, it is prudent to cap your investments in small finance banks to about 25-30% of your savings and diversify your investments across three or four such banks.
Be aware that the deposit insurance is restricted to ₹1 lakh per depositor per bank.
Play it safe on NBFCs
NBFC deposits are riskier than banks’ because they are both uninsured and unsecured. Deposit-taking NBFCs and housing finance companies (HFCs) are regulated by the RBI and National Housing Bank respectively.
But recent episodes of payment delays, defaults and rating downgrades faced by some NBFCs show that even NBFCs that enjoy the highest credit ratings at the time of your making the deposit can be downgraded later if their finances deteriorate.
So, if you are thinking of investing in an NBFC deposit in the current circumstances, you must run three additional checks. One, go only for NBFCs backed by well-established industrial groups with a long track record of servicing public deposits. Two, stick to AAA-rated NBFCs but also check out the company’s rating history in the rating report, to see if the high rating has been sustained for the last five years. Three, stay off NBFCs or HFCs that are outliers on rates, as high returns are always a sign of high default risks in debt instruments.
Sticking to reputed deposit takers such as Sundaram Finance, HDFC and Mahindra Finance, even if it means settling for slightly lower rates is best under present circumstances.
Don’t forget to cap NBFC deposits at 30% of your investments and to diversify across two-three NBFCs.
Both in NBFC and small finance bank deposits, stick to two to three -year terms to take advantage of any turn in the interest rate cycle.
With liquidity tightening in the debt markets, a number of NBFCs are turning to retail issues of non-convertible debentures (NCDs) to raise funds.
They’ve been offering interest rates of 9% to 10.5% with maturity dates ranging from two to 10 years. NCDs are less regulated than public deposits and carry higher risks. Therefore, regular income investors should consider NCDs as an option only if they have exhausted all the above options and do not mind putting some of their capital at risk.
