Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Are safe investments sufficient to fulfil your life goals? - Outside View by PersonalFN
Are safe investments sufficient to fulfil your life goals?

"Let's invest the surplus money in a fixed deposit." How many times have you thought about this? Well, you are not the only one. Many people prefer investing only in debt and fixed income instruments, as these are generally less risky as compared to other asset classes such as equity and gold. Many feel that it is extremely important to protect their portfolio from market volatility at all times irrespective of other factors. Although, it cannot be denied that debt instruments restrict your downside risks they might not help you meet your financial goals (such as retirement, children's education etc.) only by themselves.

The following points will help you understand this in detail:

  • Inflation beating returns

    Before you invest in any instrument it is necessary to consider the 'real returns' generated by it. 'Real returns' is nothing but excess nominal returns over and above the inflation. For example, if your investments generate 10% returns and the rate of inflation is 8%, your real returns are 2%. Although fixed interest rate bearing instruments generate steady returns, real rate of returns generated by them may be negative if rate of inflation is higher than the interest rates.

    These are 'low risk-low return' investments which are ideal for providing safety rather than capital appreciation. Equities, on the other hand, although volatile have the ability to not only counter inflation but also create wealth for the investor over the long term.

    Rate of interest on various debt instruments
    Public Provident Fund 8.70% p.a.
    National Saving Certificate (5 years) 8.68%*
    National Saving Certificate (10 years) 8.99%*
    Bank Deposits 8.50% - 9.00% p.a.
    Post Office Time Deposit (5 years) 8.5%**
    (*effective interest rate per annum)
    (** compounded quarterly, paid annually)
    (Source: PersonalFN Research)

    The debt instruments shown in the above table at present generate returns in the range of 8.50% - 9.00% for a general citizen. However, taking the Consumer Price Inflation (CPI) into account, the real rate of returns generated by these instruments will fall in the range of 0.70% - 1.20%, which may not be sufficient to achieve all your long term goals.

  • Tax implication

    Income from debt instruments such as fixed deposits has to be added to your taxable income and is taxed as per your tax bracket. If you fall in the 30% bracket, the return earned on your fixed deposit gets lowered by that much amount. Thus the actual returns generated, might fall short in your endeavour towards wealth creation. Moreover, the recent budget has reduced the tax efficiency of even debt mutual funds. In case of mutual funds other than equity oriented funds, the rate of tax on Long Term Capital Gain (LTCG) has been increased from 10.0% to 20.0% on transfer of units of such funds. Moreover, the period of holding in respect of such funds (to be categorised as LTCG) has been increased from 12 months to 36 months. These new provisions place bank fixed deposits and debt mutual funds almost parallel. And by doing so, PersonalFN believes going forward Fixed Maturity Plans (FMPs) will not continue to offer double-indexation benefit (as they did) if the investment tenure is lower than 36 months.

    Conversely, in case of equities, the period of holding (to be categorised as LTCG) is only 12 months. Moreover, income arising on the sale of shares of companies and equity oriented mutual funds are exempt from LTCG.
Now, does all this mean that investments in debt instruments must be avoided and one should only invest in equities? Definitely not! It is important for you to understand that your portfolio must well-diversified keeping in mind your asset allocation and risk appetite. Asset allocation is an investment strategy that helps to define a road map for your investment portfolio, with appropriate diversification across asset classes. Under ideal circumstances, investors who have an aggressive risk appetite and whose objective is to achieve long term capital appreciation can invest upto 70% in risky assets such as equities and related instruments, and the remaining 30% in safer asset classes such as debt and cash instruments. Moderate investors, who aim at providing some stability to their portfolio along with capital growth, may invest upto 60% in equities and balance (40%) in debt and cash. Conservative investors', who prioritize the protection of their capital, can invest upto 70% in debt and cash, while the rest can be diversified by investing in quality equity instruments. However, before you follow this asset allocation pattern, it is necessary to consider factors such as age, income, expenses, assets, liabilities, time horizon and willingness to take risk.

PersonalFN is of the view that constructing a financial plan and adopting a prudent asset allocation pattern will enable you to meet all your financial goals in a structured and planned manner. Since every individual may not have the time and expertise to undertake these processes on their own, it will be wise to take the help of an experienced financial planner so as to meet your objectives in a simple way.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


Equitymaster requests your view! Post a comment on "Are safe investments sufficient to fulfil your life goals?". Click here!


More Views on News

The Right Financial Advisor Is Around the Corner (Outside View)

Mar 10, 2016

An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

Why financial planning should be dull and boring (Mutual Fund Corner)

Feb 29, 2016

Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

What Are E-Wallets And How To Use Them (Mutual Fund Corner)

Feb 12, 2016

PersonalFN highlights the benefits of parking a portion of your expenses in e-wallets and using them efficiently.

Is Consumption Boom Over In India? (Mutual Fund Corner)

Feb 2, 2016

Mutual funds take a bearish call on the FMCG sector. The sector has started playing out due to a combination of slower growth and expensive valuations.

How to Find a Saint Amongst Sinners? (Mutual Fund Corner)

Feb 1, 2016

Ethical practices help build long lasting relationships, and healthy long-term business relationships are often mutually rewarding. But PersonalFN is of the view that the financial services industry in India seems to have forgotten this.

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms