Interest rates have started downward journey and in the quarters to come, experts see the lower interest rates to prevail. This will impact retired families or those who invest in fixed deposits adversely as post-tax returns will further reduce. For conservative families, preferring fixed income investments, this will add to the challenge of expanding the wealth. Adjusting for inflation, real returns can actually be negative. To better manage this situation, Families can relook at their deployable assets, freeze fixed investments for longest available durations, look at tax efficient instruments, and revisit risk profile, goals and asset allocation.
The dynamics of interest rates make it imperative for you to keep changing the personal finance strategy to mitigate the negative impacts. There are many ways a family can protect itself from the falling real returns. Let’s explore these measures:
Quickly lock-in for longer term
Across various products in debt instruments, high returns can still be available based on what one needs. For example, AAA-rated corporate fixed deposits can give around nine per cent for five years or so. Normally, bank FDs are also available for five years. Some banks may offer for longer terms.
The lenders may not give the highest returns for the longest duration instruments. However, if you are clear about the need to invest in fixed income securities, then you can opt for the longest available tenor. Similarly, tax-free bonds can be checked out based on market availability.
Relook at your balance sheet
It’s time to revisit your balance sheet. Where is the money invested and how is it doing? Is there money stuck somewhere and not doing well? Is there a maturity happening in next few months that needs to be planned for redeployment? Restructuring your balance sheet may give benefits like reduced cost of borrowing, higher returns at the portfolio level and at the same time allow to get locked in for a longer maturity.
Check debt mutual funds
Debt mutual funds can save a lot of tax, if you hold them for three years or more. This is due to indexation benefits related to long-term capital gains. Based on your specific situation, medium to long term debt funds can be chosen for investments.
These can be useful for families who are vary of investing in equity instruments. If you do not mind a little bit of equity exposure, then you can look at hybrid debt aggressive or conservative category of debt MFs. These funds invest about 80 to 90 per cent of the money in debt instruments and the rest in equity stocks.
Pay attention to tax efficient investments
Investments held over 12 months in Indian equity oriented instruments are eligible for long term capital gain tax treatment. The taxation rate here is zero — no tax if equity instruments are held over 12 months. So based on your specific situation, you may be able to leverage, say equity mutual funds, and earn tax-free return.
However, you should keep in mind that equity investments give optimum performance over a long term of at least five years and you should asset the risk appetite before investing in equity. One good way to grow money is to beat inflation, save taxes, follow SIP approach, make goal based investments, keep reviewing your portfolio once in a while and take mid-course corrections.
