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MIPs – Monthly Income Plans


MIPs are hybrid debtoriented mutual fund products.They are great places to park money if you have a 2-3 year horizon.The majority of the money in this case is invested in debt and the NAVs fall when the interest rates rise.Currently the equity  markets are showing some weakness and the interest rates are high,so MIP NAVs are low.So its a good time to pick up MIPs .HDFC and Reliance are 2 fund houses that are known for their treasury management operations.And HDFC and Birla Sun Life MIPs have perfomed well due to superior management of the equity component.

Here is a video that walks you through the ABCs of MIPs:

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Liquid Funds + USTBs Vs. FDs


Here is a video laying out the pros and cons of investing in liquid and liquid plus funds vs FDs.Where you invest will depend on the guarantees you seek,the amount you wish to deposit,the interest rate scenario in future,prevailing interest rates,tax liabilities,the use you wish to put your cash to in future etc.Do watch the video before you decide either way.

Personally I have found that sometimes you get short term FDs that offer better rates for senior citizens than the mutual funds.And the most important takeaway from the video is that FDs can be used to lock in high rates in a falling interest rate scenario.

Economic Life,Sinking Funds,Amortization and RDs


wealthymatters.comHaving an abundance of material resources and never having to hustle round in the last-minute to find the funds to do what we want to do is a good indicator of wealth.

I first came across the concepts of economic life,sinking fund and amortization as an engineering student.Adapted to our personal finances and business these concepts help us to always have enough money at the right time.

Economic life , a.k.a useful life is the period of actual usefulness of an asset.Beyond this period it is cheaper to replace or scrap the asset than to continue maintaining it.

A sinking fund is a reserve created by periodically setting aside certain sums in an account to replace  an asset in future or to repay a liability.

Amortization refers to spreading an asset’s replacement cost over it’s economic/useful life. Read more of this post

Laddering


wealthymatters.comNormally,for fixed income instruments , the interest rates corresponding to longer terms are higher than those for shorter terms.However,locking in money for longer periods is not always an option.One way of ensuring a greater degree of liquidity while taking advantage of the higher rates offered for the longer tenures is laddering.

If you want to create a 5 year ladder you could buy a 1year, 2year, 3year,4year and 5year instrument .Then after the first year,renew the matured 1 year instrument for a term of 5 years.Then the following year do the same with the matured 2year instrument.Continue the process.

Laddering ensures that at least some of the higher interest rates are locked in and that the average rate is higher than the rates at the lowest point in the interest rate cycle.

If you are drawing an income from your fixed income instruments say to pay or part pay you a pension,your EMIs,a tution fee or get some passive income,laddering smoothes out the variations.

Laddering is possible with bonds,NCDs,FDs,CDs etc.

Breaking a Fixed Deposit


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Breaking a FD means pre-mature withdrawal of your money locked in a FD i.e. taking out the money before the term of the FD is over.When you break a FD, banks don’t give you the rate of interest at which you booked the FD ; instead you get the rate applicable for the duration for which you actually kept the money with the bank.For example if you made a FD for 4 years, at an interest rate of 8% and now you wish to break it after 2 years ,you would get the rate applicable to a 2 year FD prevailing at the time when you had booked your FD, and not the 8% which is noted in your FD certificate.So, if the rate for a 2 years FD was 7.25% when you had booked your 4 year FD, you would only get an interest of 7.25% per annum for the 2 years you would have actually kept the money with the bank.In addition there is often a penalty to be paid,comm0nly a further 1% deduction.Some banks do waive off this penalty if the liquidation or premature withdrawal of the FD is due to some emergency. But the word “emergency” is not well defined and this waiver is given on a case-to-case basis.Some banks also waive off the penalty if you reinvest the withdrawn amount with the bank. Some banks provide this waive off only if the new FD is kept for a period higher than the remaining period of the original FD.So there is some leeway to negotiate to avoid paying a penalty while attempting to break a fixed deposit. Read more of this post

Tax – Saving Fixed Deposits


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In Budget 2006, the government extended tax benefits under section 80C of Income Tax Act, 1961 to five-year tax-saver deposits. As per this provision, a tax-payer is eligible for exemption on five-year deposits on investments up to Rs 1 lakh. These fixed deposits are locked in for a five-year period . There is no option of premature withdrawal. Also, you cannot pledge this type of term deposit as collateral to secure a loan to meet liquidity needs. Similarly, banks do not offer overdraft facility on tax-saver deposits.Unlike the plain vanilla fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This means a person cannot link fixed deposit to their savings account so that the surplus funds in the savings account can be automatically invested in this fixed deposit.In addition, there is no overdraft facility available on the tax-saver FD. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD. Read more of this post

Company Deposits – Caveat Emptor


wealthymatters.com

When inflation is high and interest rates on term deposits and bonds are low,or when fixed income instruments start offering equity like returns during liquidity crunches, company fixed deposits  become  tempting.Here are a couple of things to consider to rein in your greed.

  • No one became a billionaire via company deposits, unless he owned the company taking the deposits, so hold your horses!
  • Company deposits can be tax inefficient,so think twice before sticking your in money here.
  • A company FD is an unsecured debt so if a company is liquidated,FD holders are paid after debenture holders and commercial lenders. By then there might not be enough to pay back the principal, much less interest.Liquidation proceedings take time so even whatever little money might be returned to you will take a while to come.So avoid companies with accumulated losses.
  • Along with ability to pay there is the matter of a willingness to pay.There are instances of companies vanishing after  collecting money.So avoid companies you don’t know already know about.If you try to read up on the company,you might be influenced by planted material.Also avoid companies that do not pay regular dividends because they are often run by promoters who have no intention of sharing anything with anybody other themselves.Prefer companies with a good reputation.Having invested in building a reputation they are not likely to risk it by defaulting.Avoid companies with poor servicing standards.Chasing after your own money is a real drag. Read more of this post

Running The Interest Rate Race


wealthymatters.comIn inflationary times fixed income instruments may not be such a great idea , especially if the interest rates are just not that high.But there is no way we can avoid these instruments.We need them to add steadiness to our portfolios especially when the stock markets show volatility.We need  them to  park the money we plan on using within a definite time horizon.We need them again  when we have to route a steady stream of  payments into another investment and want to simultaneously avoid both the risk of a capital loss due to a short term investment in a mutual fund and the low returns of a liquid fund.In such a situation we just need to find the highest possible interests which our funds can earn in a given time over and above the rate of inflation while simultaneously reducing the risk of capital loss.

The newspapers such as The Times of India (on the left hand corner of the front page),The Economic times and The ET Wealth Times carry advertisements/tables of interest rates offered.But more comprehensive resources are available online at

http://economictimes.indiatimes.com/pf_banksfd.cms

http://economictimes.indiatimes.com/pf_corpfd.cms

http://www.safeinvestonline.com/search/label/FD%20Schemes

 http://www.bajajcapital.com/investments/fixed-deposits/govt-companies.php                          

                                                              &

http://www.ratekhoj.com/fixed-deposits/index.php

Hope these links help you a bit in running the interest rate race.

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