The pros and cons of investing in fixed deposits

Traditionally the most favoured investment avenue in India, bank deposits continue to hold fort even today. The total fixed deposits with banks in India amount to a whooping Rs 35,68,435 crore (Rs 35,684.35 billion) as per Reserve Bank of India [ Get Quote ] data. Bank deposits do not have the excitement surrounding other investment avenues like equity shares or real estate investments. But bank deposits serve the purpose of preserving capital, which is the most wanted at certain times.

Current income

Bank deposits are most sought after for this purpose. They give a stable and fixed return on the invested money. Traditionally, the interest rate is fixed during the tenure of the fixed deposit. Some banks now-a-days have gone for the reduction in existing bank deposits too, when the market interest rates come down.

The income comes to us in the form of "interest" for the deposit amount. The principal (initial amount invested) is returned back to us at the time of maturity. There are options to receive the interest on a monthly/ quarterly / half-yearly or yearly basis. In case we do not need the interest to come to us during the term of the deposit, we can opt for the cumulative deposit option, where it is credited to the deposit and earns additional interest. Interest is generally compounded on a quarterly basis.

The historical average return from fixed deposits in India is approximately 8 per cent for long term deposits (5 years). The highs and lows have been in the range of 13 per cent to 4 per cent.

Capital appreciation

Capital appreciation does not apply to bank fixed deposits. Only the principal invested is returned back at the time of maturity.

Risk

Perhaps the main reason for investment in bank deposits is safety of the principal. The capital (only upto Rs100,000 though) has the highest safety compared to any other investment as it is guaranteed by the Deposit Insurance & Credit Guarantee Scheme of India. All banks operating in India are covered under this scheme.

More than this guarantee, the close monitoring that RBI has on all banks in India is a big advantage to the safety of the investors in fixed deposits.

The risk faced when investing in bank deposits is the interest rate risk. This is associated with the lost opportunity to invest in an instrument that has a higher return. Getting out of a fixed deposit can be costly (up to 1 per cent of the principal), when we exit prematurely. So we may have to forgo potential earnings when the interest rate has risen only by about 1 per cent.

The highest risk faced with fixed deposits is the effect of inflation. The real return after adjusting for inflation is very less or sometimes negative for fixed deposits of banks. This is a big burden, particularly for retired people, who have invested their retirement proceeds to get regular income. Their income may be regular and steady but the money's worth keeps going down during the tenure of the fixed deposit.

Liquidity

Bank deposits have good liquidity. They can be closed and the principal withdrawn within a few hours in some banks to a couple of days in others.

The other option is to take a loan on the fixed deposit. Banks lend upto 90% of the principal of the deposit. Interest charged for this is only about 1 to 2 per cent and only for the period that we have used the cash (The feature works like an over-draft against the fixed deposit).

Tax treatment

Bank fixed deposits are not tax efficient. The interest is taxed. Also there is no benefit from making the investment.

There are the 5-year bank deposits (tax saving) that give benefit under section 80C of the IT Act. But the benefits such as partial withdrawal or closure, and loan facility are not available. The deposit rates are also lower compared to the normal fixed deposits. This effectively negates the tax saved.

Convenience

This is pretty high with bank deposits. The investments can start from very low amounts (Rs 100 in most cases). There are no upper limits for investment. However, investments above Rs 50,000 will require your PAN card.

For a regular saving for a short period (up to 2 or 3 years maximum) the recurring deposit option can be made use of. Most banks offer standalone deposit accounts, though some may ask for starting a linked savings account.

The deposit periods can even be for very short periods starting from 15 days. This helps us to temporarily park funds before we could decide on an investment or an expense (choosing the wedding ring or buying a car for example.)

Fixed deposits can also be linked to savings accounts of banks in the form of a sweep-in-deposit. This gives the benefit of higher rate of return (when money is in excess) and flexibility to use the money when required.

In conclusion

The bank deposit primarily serves us to preserve capital. Banks now-a-days have added a lot of additional benefits to the traditionally benign service. Retired people could make the best use of this avenue for securing a fixed and steady income.

The caution is not to use the fixed deposit as a long term investment avenue. The reason is that the real return is very less when adjusted for inflation. The tax treatment of the interest also eats into the returns.

Source:
© : rediff.com, BankBazaar.com

Investment & Investing

Investment refers to the concept of deferred consumption, which involves purchasing an asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various investment options are available, offering differing risk-reward trade offs. An understanding of the core concepts and a thorough analysis of the options can help an investor create a portfolio that maximizes returns while minimizing risk exposure.

Types of Investments

The various types of investments are:

• Cash investments: These include savings bank accounts, certificates of deposit (CDs) and treasury bills. These investments pay a low rate of interest and are risky options in periods of inflation.


• Debt securities: This form of investment provides returns in the form of fixed periodic payments and possible capital appreciation at maturity. It is a safer and more 'risk-free' investment tool than equities. However, the returns are also generally lower than other securities.


• Stocks: Buying stocks (also called equities) makes you a part-owner of the business and entitles you to a share of the profits generated by the company. Stocks are more volatile and riskier than bonds.


• Mutual funds: This is a collection of stocks and bonds and involves paying a professional manager to select specific securities for you. The prime advantage of this investment is that you do not have to bother with tracking the investment. There may be bond, stock- or index-based mutual funds.


• Derivatives: These are financial contracts the values of which are derived from the value of the underlying assets, such as equities, commodities and bonds, on which they are based. Derivatives can be in the form of futures, options and swaps. Derivatives are used to minimize the risk of loss resulting from fluctuations in the value of the underlying assets (hedging).


• Commodities: The items that are traded on the commodities market are agricultural and industrial commodities. These items need to be standardized and must be in a basic, raw and unprocessed state. The trading of commodities is associated with high risk and high reward. Trading in commodity futures requires specialized knowledge and in-depth analysis.


• Real estate: This investment involves a long-term commitment of funds and gains that are generated through rental or lease income as well as capital appreciation. This includes investments into residential or commercial properties.

Sources: EconomyWatch.com

A few simple things done regularly can make a real difference...

Put yourself in charge

Have a plan for your money and stick to it.

Prepare a budget for yourself and keep it up to date.

Establish a savings habit – save as much and as regularly as you can.

Take control There's more you can do too:

Take a hard look at your loans and credit cards and see what scope there may
be to consolidate them or adjust some of your spending habits.

Look for opportunities to make your money work harder by investing, and check
if you’re contributing enough to your superannuation.

Think about strategies for protecting your money, such as making sure that you
have the right insurance.

Shop around and get information and advice if you’re not sure about managing
your money or if you need help.

A few simply things....

No matter who you are or what you earn, it's easier than you think to take control of your money. A few simple things done regularly can really make a difference.

A few simple things will put you in charge. You will be able to do more with your money today and let yourself do the things you want tomorrow.

The important thing is to get started.

To get started

Set some financial goals

Work out your budget

Get into the savings habit

Set some financial goals - your goals don't have to be big but you need to focus on what you really want. Your goals will be influenced by your age, your family commitments and your financial situation. You may want to control your debts, buy a new car, have enough for a deposit on a home, or be ready to retire in comfort. It doesn't matter what your goals are, what is important is that you have some.

Work out your budget - working out your budget does not have to be complicated and will help you take charge of your money. Knowing where your money comes from and where it goes is a good staring point towards reaching your goals.

Everybody who does a budget and keeps it up to date sees how it pays off. If you are spending more than you earn, a budget can show you where you might be able to save money.

If you have money left over, you might be able to make better use of it. Write down all of your income and expenses, subtract one from the other to see if you are spending more than you earn.

Get into the savings habit - the secret to successful saving is simple. Start now. Even a small amount saved regularly can really make a difference and help you reach your goals.

There are lots of ways to get started. Some people like to do a budget to work out what they can save. Others start by putting away a small amount each pay. Whatever works for you, the trick is to start now. You can also make it easy by setting up an automatic deduction so you don't have to think about it.

Mutual Fund - Concept, Organisational Structure, Advantages and Types

CONCEPT

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:



Mutual Fund Operation Flow Chart



ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:



Organisation of a Mutal Fund



ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are:
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated



TYPES OF MUTUAL FUND SCHEMES

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.



FREQUENTLY USED TERMS

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price

Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price

Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related.

Redemption Price

Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’Load

Is a charge collected by a scheme when it buys back the units from the unitholders.

SOURCES: AMFI

Monthly Income Scheme Indian Postal Scheme

Monthly Income Scheme
Safe & sure way to get a regular monthly income.

Specially suited for retired employees/ Senior Citizens or any one with high sum for investment .

Rate of interest 8%.

10% Bonus on maturity. (withdrawn w.e.f 13th February 2006)

Maturity Period - Six Years.

Post maturity Interest at the rate applicable from time to time (at present 3.5%)

Auto credit facility to SB Account.



Type of Account
Minimum limit - Maximum limit

Single
Rs. 1000/ - Rs. 3 lakhs

Joint
Rs. 1000/ - Rs. 6 lakhs


Deposit in Monthly Income Scheme and invest interest in Recurring Deposit to get 10.5% (approx) interest.

Above scheme operates automatically, if you open a saving bank account and give a request for automatic transfer of Monthly Income Scheme interest to Recurring Deposit through Saving Bank account.

Frequently Asked Questions (FAQ) on Indian Postal Investments

1. How can I claim payment of deceased account / certificate holder?

The claimant may be the nominee or legal heir.

If there is nomination, the nominee can prefer the claim in the prescribed form alongwith death certificate.

If there is no nomination, any one of the legal heirs can prefer the claim in the prescribed form [SB84]. For this death certificate and consent statements of all legal heirs are required. Claim upto one lakh cane be settled.

If the claim is exceeding one lakh, claims can be settled by legal evidence ie, by probate of will or succession certificate.


2. How to transfer accounts and certificate?

For transfer of accounts- the depositor should apply in the prescribed form[lSB10(b)] or manual application. The application can be given either in transferring office or transferee office.

For transfer of certificates- the investor should apply in the prescribed form[NC32]. The application may be given in either of the offices.


3. How to open an account in post office and its requirements?

To open an account [Savings Bank(SB), Recurring Deposit(RD), Time Deposit(TD), Monthly Income Scheme(MIS) SB3, SB103 (pay-in-slip) and specimen signature slip for SB and TD are required.

For senior citizen accounts, separate forms are to be used. For SB account introduction is compulsory.


4. What is silent account and how to revive it?

When there is no transaction in an SB account continuously for 3 financial years, the account will be treated as silent account.

For revival, one application from the customer is required. LSG/HSG offices can revive the accounts independently. Remaining offices, HO will revive the accounts.

If the balance in the silent account is less than minimum, then Rs. 20/- will be debited towards service charges.


5. What are late payment fees for recurring deposits?

The monthly deposits should be credited on any day of the month. If the monthly instalment is not credited for any particular month, then it becomes a default. The defaulted months can be credited subsequently (for Rs. 10/- denomination, 0.20 paise for each month of default) maximum 4 defaults are allowed.


6. What is the procedure for the issue of duplicate certificates?

The investor should apply in the prescribed form for duplicate certificate om respect of lost, stolen, destroyed, mutilated or defaced certificates (NC29).

The application shall be accompanied by a statement showing particulars of certificates and furnish an indemnity bond in the prescribed form with one or more sureties or with a bank guarantee is required.

In case of mutilated or defaced certificates, no indemnity bond is required.


7. How I get duplicate passbook?
Application in the prescribed form or manuscript application may be given by affixing prescribed fee in the form of postage stamp. New duplicated Passbook will be issued by sub post offices only.


8. What are the norms for issuing a Cheque Books?
Cheque books are issued in respect of cheque accounts

In cheque accounts, minimum balance should be Rs. 500/-


9. What are the service charges for outstations cheque?
Cheque realisation charges for outstation cheques.

Rs. 30/- for first thousand or part

Rs. 31/- for each additional thousand or part

In case of bouncing of cheque Rs. 50/- is charges as service charge.


10.Can Monthly Income Scheme (MIS) interest be credited to RecurringDeposit (RD) account?

No. There is no provision. Interest amount can be credited to SB account and after that from SB to RD is permissible.


11.What is the minimum balance required for an account?
Minimum balances in respect of different types of account is given below.

SB(cheque account)
Rs. 500/-

SB(non cheque account)
Rs. 50/-

MIS
Rs. 1000/-

TD
Rs. 200/-

PPF
Rs. 500/-

Senior Citizen
Rs. 1000/-



12.How I can get encashment of certificates / account before maturity?
NSCs
No premature encashment possible. Lock up period is six years

KVPS
Premature encashment is possible after 2 years 6 months. Proportionate amount as per the table is payable

Different Savings Accounts

SB
Can be closed at any time

RD
Premature closure permissible after 3 years - only SB rate is permissible

TD
Premature closure permissible after 6 months

MIS
Premature closure permissible after 1 year

Senior Citizen
Premature closure after 1 year


Source: India Post