The crunch in liquidity is likely to result in high interest rates on bank & corp FDs

Make the best of uncertainty

THE STOCK market is on a roll and equities are becoming increasingly expensive. Risk takers are picking up stocks and lapping up the public issues lined up in the rising market. Thanks to the Center's disinvestment target of Rs 40,000 crore for 2010-11, a number of public-sector companies have lined up attractively priced share sales. In such a scenario, what should your strategy for 2011 be? "The proportion of your savings that should be allocated to debt depends on your age, risk profile and financial goals, but it should neither be zero nor dangerously high," says Harsh Roongta, founder and CEO, Apnapaisa.com. "In general, you can follow the '100 minus age' rule to decide your equity exposure and invest the rest in debt." For a 40-year-old, the investment portfolio should have 60 per cent equities and 40 per cent debt. If you are in the highest tax bracket of 30 per cent, analysts suggest exhausting the entire limit of `Rs 70,000 as annual investment in Public Provident Fund (PPF) to achieve the tax deduction limit of Rs1 lakh under Section 80C of the Income Tax (IT) Act. Your investment gets locked in for 15 years, but a tax free annual return of eight per cent, along with tax benefits, makes it one of the best debt investment options.
The Employees' Provident Fund Organization (EPFO) has increased the rate of interest for 2010-11 from 8.5 per cent to 9.5 per cent. Though the increased rate is valid only for the current fiscal, analysts say that increasing your EPF contribution within your debt allocation limit is a good option, provided you don't need the money in the immediate future. You can take loans against your EPF account for select purposes, such as buying a house or its renovation, education of children and marriage of children or siblings. Premature withdrawal is allowed only on completion of a minimum membership period, which varies according to the purpose of the loan. In contrast, bank fixed deposits have been offering 7.5- 8.5 per cent for investments ranging between 18 months and three years. With sustained shortage of liquidity in the market, several banks raised their deposit rates in December. The Reserve Bank of India (RBI) had also been pushing the banks to raise deposit rates and cut lending rates to help the economy expand at a faster pace. "For a slightly higher yield, you can opt for company fixed deposits. However, unlike bank fixed deposits, corporate fixed deposits are not protected through any guarantee," says Kartik Varma, co-founder, iTrust Financial Advisors.
With commercial papers fetching around nine per cent, short term fixed maturity plans are good for those considering debt, says Roongta. If you haven't invested in any infrastructure bond, you should not miss the opportunity to put in `20,000 in the notified infra bonds that are in the pipeline. This amount will be eligible for an additional tax deduction in 2010-11 under Section 80CCF of the IT Act. Once the DTC comes into effect from April 1, 2012, the Rs 1 lakh tax deduction allowed under Section 80C of the IT Act will be available only for investments in retrial accounts, such as PPF, EPF, New Pension Scheme, and in government notified saving schemes. These investments will fall under the EEE taxation treatment — exempt at the time of investment, during accumulation and at withdrawal. If you are saving for the short term, analysts advise not to rule out the National Savings Certificates (NSCs) and post-office savings deposits. "NSC combines tax saving with liquidity," says Roongta.
An investment of Rs 100 in NSCs grows to Rs 160.10 at maturity after six years. The annualised return from NSCs comes to 8.16 per cent before tax. The postal department also offers fixed deposits with a lock-in period of one year. The rate of interest is 6.25 per cent, 6.50 per cent, 7.25 per cent and 7.5 per cent for one, two, three and five years, respectively. After accounting for the tax deductions under Section 80C, the effective return from these instruments will be higher. Even at maximum level, debt instruments will give a pre-tax return of 10-11 per cent. Though they keep your money safe, excess exposure will lead to erosion of its value. So even though inflation may have dropped to 7.5 per cent in November, the real yield from debt instruments will be nominal or negative.

thank u
yahoo finance