Paper Assets | wealthymatters

Laddering

April 10, 2011 4 Comments

Normally,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.

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The Yield Curve

April 6, 2011 5 Comments

The yield curve is a graph that plots the yields of similar-quality debt instruments against their maturities, ranging from shortest to longest. The yield curve is is also known as the term structure of interest rates. As yield curve shows the various yields that are currently being offered on debt instruments of different maturities it helps investors quickly compare the yields offered by short-term, medium-term and long-term debt instruments.

The yield curve can take three primary shapes. If short-term yields are lower than long-term yields i.e.the line is sloping upwards, then the curve is referred to a positive (or “normal”) yield curve. Below you’ll find an example of a normal yield curve.

Breaking a Fixed Deposit

April 6, 2011 9 Comments

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

Filed under Paper Assets, Tool Kit Tagged with Breaking a Fixed Deposit, calculations, emergency, FD, Fixed Deposit, Interest Rate, penalty, postaday2011, Premature Fixed Deposit, RandomBlog2011, Should you break a FD?

Tax – Saving Fixed Deposits

April 4, 2011 4 Comments

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

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Bank Fixed Deposits

April 4, 2011 4 Comments

A bank FD is a savings instrument where you deposit an amount with the bank for a fixed duration.You earn a fixed rate of interest on this investment. The interest rate is fixed at the time of the investment – even if interest rates change during the tenure of the FD, the interest that you earn on your FD remains fixed. A FD is also called a Term Deposit at times, as it is an investment for a pre-defined term.

All banks have their own rules on minimum deposits.Most nationalized banks will start a FD with just Rs.1000.

The tenure of a FD can be anywhere from 15 days to 10 years.The rate of interest offered on a FD depends on various parameters: the prevailing interest rates, the duration of the FD, the amount of the FD, your age, etc.Usually, the longer the tenure of the FD, the higher is the interest rate.However,when the economy has a liquidity crunch,banks do offer higher rates on short-term deposits too.They also come out with Special Term Deposits of more unusual tenures such as 555 days, 1001 days etc.Most banks offer a different rate of interest on FDs of more than a certain amount, usually Rs. 15 Lakhs.Also, most banks offer an extra 0.5% per annum to Senior Citizens.Some banks also offer different rates for Trusts and Societies. Read more of this post