by Moiz Mannan
Non-resident Indians, who want to see their money grow in India, have had it very good over past months with attractive bank deposit rates and rising stock indices.
However, with the clamour for an interest rate cut by the Reserve Bank of India (RBI) increasing on the back of falling inflation and oil prices, several leading banks have already started reducing the rates on interest on fixed deposits.
December 2014 has the country’s largest bank, State Bank of India (SBI), and the biggest private sector lender ICICI Bank cut interest rate for FDs of various maturity baskets by 25 to 50 basis points already. Several other public and private sector banks such as HDFC Bank, Oriental Bank of Commerce and Punjab National Bank have effected similar cuts. One of the major reasons is an anticipation of lending rate cut in the near future.
At a time when the rupee is on a downward journey, it would make sense for NRIs to utilise the exchange advantage and park more money in India. According to a recent PTI report, the ongoing fall in the rupee, the remittances volume from the Gulf and other regions have seen a massive spike. Estimates of the jump in volume range between 25 and 75 per cent in the past one week alone.
The risk-averse, though, would be already feeling jittery about investing too much in the stock markets, having seen the massive fluctuations of late. In the opinion of several financial experts, this is a good time for the risk-averse investor with a longer horizon to commit a portion of the portfolio to debt instruments such as Gilt Funds.
Gilt funds have given annualised returns to the tune of 20-25 per cent in the past three months, and long-term income funds have returned 18-20 per cent annualised for the same period, said a Livemint report earlier this month.
The analysis notes that the interest rate cycle in India is yet to turn and as and when the anticipated rate cut by RBI comes, investors would be able to gain from the next phase of the fixed income rally. Gilt funds invest in government securities and income funds. They form a category of debt funds. A pure debt fund is a mutual fund which would generally invest its corpus in assets generating fixed income. The underlying investments are generally in Central and state government bonds, treasury bills, government securities, high credit rating corporate non-convertible debentures (NCDs), etc. These investments are generally considered very safe as credit rating of the underlying issuing companies/government is very high and a chance of default is negligible.
Like other mutual funds, one can purchase units of these funds based on daily NAVs (for open-ended funds).
Traditionally, FDs have given returns of 6 -10 per cent over the past 5 years. However, the average return from debt based funds has been around 11.75 per cent pre-tax as compared to 9-10 per cent returns given by FDs in the last 5 years. Even if we assume that both FDs and debt funds will give same returns, say 9 per cent, in the next 15 years, even then post tax returns for debt funds will be much higher for people falling in higher tax brackets (20 and 30 per cent).
Gilt funds, however, are highly susceptible to interest rate risks. They have in fact given negative returns in years when interest rates rose sharply. On the other hand, they delivered double-digit returns in 2001 and 2002 as interest rates fell.
The Peninsula
