ORO Weekend Reads: 9 - 14 Jan 2017

This week in ORO Weekend Reads: Understand the risks and returns in different types of equity mutual funds, find out what you can do even if you have missed the deadline for tax-saving investment declaration and how you can budget for quitting your day job traveling around the world.

Get ready to immerse yourself in the best stories from personal finance this week.

ORO Wealth Exclusives

We revisit an old blog post which remains quite relevant Understanding the different types of mutual funds in equities

From the News 

Have you missed the deadline for tax saving investment declaration? Don't worry Here is what you can do

All that you need to know about the Further Fund Offer of CPSE ETF. Also see here

You can now get your detailed credit report for free every year. Find out how.
These mutual fund houses accept investments from US and Canada-based NRIs

In this tax season, here is  All about the taxability of investments in a minor child's name

Further news on Payment Banks, Airtel reveals cash withdrawal charges, As Paytm becomes a bank what happens to money in your wallet

Around the Web

Budgets can be sexy. See their post on, How to make a budget for world travel

A new design of the PAN card will be in effect from Jan 1 2017

HDFC Bank checks for creditworthiness by reading user emails. But also see some good news from them HDFC Bank offers facility to pay bills using missed call

Hope you enjoyed reading! Subscribe to our newsletter to receive it directly in your inbox every week.

ORO Weekend Reads: 2 - 7 Jan 2017


Happy New Year! In the first edition of ORO Weekend Reads this year: You need to see to believe the difference in performance between direct and regular mutual funds in 2017. Plus how should invest post the Government's decision to leave PPF rates unchanged, Should you be switching your home loan and some handy investment tips and tools for 2017.

Begin 2017 with ORO Weekend Reads. Stay informed, Stay invested, Stay prosperous.

ORO Wealth Exclusives

The Government has left interest on Small Savings Schemes unchanged  What does this mean for your portfolio?


On Direct Plans

You need to see the difference to believe it Performance comparison of direct mutual funds vs. regular mutual funds

Zero commissions in your mutual fund statement does not mean you have not paid commissions! Always make sure your mutual fund name says 'Direct Plan'



From the News 

Banks announce a big cut in home loan rates. A detailed discussion of the impact on those with home loans

Handy tips and tools for investing in 2017: 10 smart money moves and a Financial Calendar for 2017

A step-by-step guide on downloading and using the BHIM App

Interesting charts on the impact of Trump vs. Demonetisation on Indian Equity Markets



Around the Web

Not something you may come across very often,  Who should not invest in equities

You may be spending too much time saving if you are guilty of these 5 money-saving hacks which are a huge waste of time. 

Not finance but definitely useful for your career, How to write a good email introduction

Hope you enjoyed reading! If you did not receive this newsletter via email, then start one good habit in 2017. Subscribe to our newsletter to receive it directly in your inbox every week.

Small savings schemes interest rates Jan-Mar 2017 kept unchanged

Recently interest rates have come down after demonetization, as supply of funds in the system has increased an people are expecting a central bank rate cut. Major banks  have cut FD rates. However the Government has left interest rates on small savings schemes unchanged increasing their attractiveness for those looking for safe places to park their money.

A table of of how interest rates on these schemes have evolved since April 1 2016 when they were first linked to G-sec yields on a quarterly basis. Over this period interest rates have been falling due to central bank rates cuts. As a result interest rates on small saving schemes have also been coming down albeit slowly.

Source: Press Releases, GOI - March 2016 and June 2016, DEA Website  

For a background on how interest rates on these schemes are set, check out the last paragraph.


Implications for your investments

The fact that interest rates on these schemes have not come down even as banks have cut FD rates now makes these schemes more attractive for those looking to park their money in guaranteed return, safe investments.

However  a few things need to be kept in mind:

1. While the rates offered on Post Office Schemes, Senior Citizen Savings Scheme and National Savings Certificate can be locked today for the entire tenure of these schemes. In the case of PPF and Sukanya Samriddhi Yojana will keep getting revised. Hence if interest rates in the economy keep going down, then rates on these two schemes will also eventually be revised lower. However, given the popularity of these schemes among retail investors we can with some safety assume, that the set rates will remain above market rates.

2. While the returns are guaranteed, they are not very high - probably just about sufficient to beat inflation but not by much. Hence investors cannot rely on these instruments to build wealth. Also the lock-in periods for some of the most attractive schemes are quite high: PPF -15years, Sukanya Samriddhi - 21 years etc.
Investors who think that interest rates will come down can do better with debt funds over a shorter horizon. Investors who are willing to commit funds for long periods, say 7+ years can expect higher returns from equity funds.

For a full list of how you can invest your money (for different risk/return preferences) with FD rates coming down, read: Top 10 investment ideas to beat low FD rates


Background on how interest rates on small saving schemes are set

Effective from April 1 2016, the Government had linked the interest rates on various small savings scheme to market interest rates. Small Savings schemes include the likes of Public Provident Fund, Sukanya Samriddhi Scheme, Senior Citizen Savings Scheme, National Savings Certificate, Post Office Monthly Income Scheme etc. This was done according to the recommendations of the Shyamala Gopinath Committee to ensure that banks are able to change their interest rates in line with the current market rates. The thought is that if  thereby enabling them to pass on central bank rate cuts, as and when they happen, effectively to borrowers.

As a result instead of being reset every year, interest rates on these schemes were to be revised every quarter based on Government bond yields (on comparable maturity) over the previous 3 months. This formula allowed for a certain spread or markup over G-sec yields: The markup for PPF, National Savings Certificate, Monthly Income Scheme and 5yr time deposit was 0.25%, for Sukanya Samriddhi Scheme it was 0.75% and 1% for Senior Citizen Savings Scheme. What this meant was that if the applicable G-sec yield over a certain period was adjudged to be 8%, then interest rate on PPF would be 8.25% .

ORO Weekend Reads: 26 - 31 Dec 2016


As we bid adieu to 2016, welcome to the year-end edition of ORO Weekend Reads. In this week's list: 2016 explained in graphics,  How do ELSS funds compare with other equity funds and find out your money score for 2016. Plus 25 incredible free sites and services that you should know about.

Begin 2017 with ORO Weekend Reads. Stay informed, Stay invested, Stay prosperous.

ORO Wealth Exclusives

With ELSS funds the focus is always on tax saving but what about pre-tax returns? ORO investigates how do ELSS funds compare with other equity funds?


From the News 

Pension options saw a flurry of changes in 2016. Check out the changes here. Also read  why you need to  Invest in EPF and NPS both rather than just in one

More encouragement to invest in NPS, NPS outshines MFs and benchmarks in 2016 and Investing in NPS is now completely online via Aadhar

What the Real Estate Act (2016) is about? A short but comprehensive discussion of what to expect.

A good checklist of how to keep you finances in order, What is your money score for 2016?

How you can obtain proofs for the various tax-saving investments/expenditures

Find out how India earns and spends with this LiveMint series based on the ICE 360' survey



Around the Web

2016 explained  in 129 graphics

Find out if you can retire today with this Retirement Calculator. But also read this more philosophical take on Why financial independence is not the holy grail

The Government's payment app, BHIM is here. Read more about it. 

And because saving is the beginning of investing, here are 25 incredibly useful free sites and services

Hope you enjoyed reading! If you did not receive this newsletter via email, then start one good habit in 2017. Subscribe to our newsletter to receive it directly in your inbox every week.

How do ELSS funds compare with other equity funds?

So you are thinking of or you already invest in ELSS funds to save taxes. But have you ever paused to think how these funds fit in your overall portfolio. Sure ELSS funds are equity funds but what kind of equity funds? Are they like large-cap, mid and small cap or multi-cap funds. This has important implications for the risk that ELSS funds bring to your portfolio.

More importantly, are ELSS funds giving returns which are appropriate for the equity risk category they are in? For instance if ELSS funds have performed better than similar non-tax saving equity funds, then this is a reason to invest in these funds even beyond the 80C limit of 1.5 lakhs. On the other hand, if ELSS funds perform worse, then investors should relook at investing in these funds, just to save taxes. We at ORO decided to look at the data and find out.

Our results show that as a category, ELSS funds should be thought of as multi-cap funds but with a stronger tilt toward large cap equities that usual, non-ELSS multi-cap funds. Further their category performance is pretty much in line with what you should expect given this classification. Individual ELSS funds can of course differ.

ELSS vs. other equity funds – comparison of benchmarks

The most straightforward way to find out how ELSS funds figure in the spectrum of large-cap, mid-cap and small-cap funds is to look at their stated investment objective. This objective is summarised in the benchmark the fund chooses for itself. 

So as a first step we looked at what percentage of ELSS funds are benchmarked to a certain equity index vs. what percentage of large cap funds are benchmarked to that index. The data is in the chart below.


Indices are arranged from narrow indices such as Sensex and Nifty 50 which only have the largest companies to progressively broader indices which have more and more small companies. For large- cap funds, as expected, ~50% of funds are benchmarked to Nifty 50 and Sensex and then a decreasing percentage is benchmarked to broader indices Comparing this this with  ELSS funds, more % of ELSS funds are benchmarked to broader indices and less to Sensex/Nifty 50. So clearly ELSS funds as a group hold more shares of smaller companies compared to large cap funds.

Based on this finding, we compared the benchmarks distribution of ELSS funds with multi-cap funds. Here the results are opposite. More ELSS (Multi-cap) funds are benchmarked to narrow (broad) indices.


This comparison of benchmarks leads us to conclude, that based on their own stated objectives, ELSS are like multicap funds with a stronger tilt towards holding large cap stocks than the average non-ELSS mutual fund.

ELSS vs. other equity funds – comparison of returns

Having thus classified ELSS funds as multi-cap funds with a strong large cap tilt, the next question that arises is whether ELSS funds have provided returns which are commensurate with this classification. The answer appears to be yes.

As we have discussed in another blog post, smaller-cap equities have a beta of > 1 to larger-cap equities. What that means is that if large cap equities move by a certain % say x, then smaller-cap equities move by more than x. This is true both when returns are positive and when they are negative.In the recent past, equities in India have gone up, therefore the performance of mid and small cap funds/indices have been better than that of large cap funds/indices. Since multi-cap funds fall between the two there performance has also been between these two categories.

Read more: The different types of mutual funds in equities

Given our discussion about ELSS funds, we should expect their category returns to be higher than that of large cap funds but lower than that of non-ELSS multi-cap funds since the latter have more small stocks. The table below shows that that has indeed been the case. Performance of ELSS funds over different historical time periods has been between that of large cap and non-ELSS multi-cap funds like one should expect from the analysis of benchmarks.


Our analysis shows that ELSS funds can be thought of as multi-cap funds with a greater exposure to large cap funds. Historical returns of the ELSS funds as a group (pre-tax) have also been in line with this classification – somewhere between large-cap and multi-cap funds.  

Hence investors, who have limit left under Section 80C can definitely go ahead and want to invest in equity funds, should definitely go ahead and invest in ELSS. 

However if you have already exhausted your 1.5l limit, then there is no reason for investing in ELSS. Investors are better-off investing in other equity funds where they can avoid the 3-year lock-in period. They can generate a similar kind of exposure as ELSS funds through a combination of large-cap and mid/multi-cap funds. These funds have a typical exit load period of 1-1.5 years and investors can enjoy long-term capital gains tax of 0 after 1 year of investment.

Other blogs in our ELSS series

Should you be investing in ELSS funds? Answer these 3 questions to know

Why save only Rs 45,000 when you invest in ELSS funds, Save Rs 51,000 instead!

Beware of mis-selling in ELSS funds

ORO Weekend Reads: 19 - 24 Dec 2016

Happy Holidays! This week in ORO Weekend Reads: Answer these 3 questions to know whether ELSS funds are right for you, why 2017 could start on a bad note for Indian equities, what to make of the EPF rate cut and how to cut travel costs this holiday season.

Get ready to immerse yourself in the best stories from personal finance this week.

ORO Wealth Exclusives

Inundated with ads of ELSS funds, then Answer these 3 questions to know whether you should be investing in ELSS funds

From the News 

Breaking the trend of optimistic equity forecasts for 2017, two reasons for why you need to be concerned. See Nomura growth indices for India plunge to lowest level since 1996 and the Nifty PE ratio is still too high for comfort

EPF rates cut from 8.8% to 8.65%, but see Why it still remains a good bet for investors looking for guaranteed returns. Also see After EPF, get ready for PPF and NSC rate cut
Mutual fund names can be confusing but things may get easier with this guide to recognizing which mutual fund scheme does what from its name

Online policies of PSU insurers being offered at a discount to encourage cashless payments. Also see 10 major incentives for going cashless

Snapdeal is now delivering cash at your home, for a convenience fee of just Re 1 (paid through FreeCharge ofcourse!)

Around the Web

Equally relevant for all the year-end Sensex and Nifty forecasts, Wall Street's Annual Stock Forecasts: Bullish, and often Wrong. The reason maybe has to do with the little luck that Analysts have had in forecasting turning points in the market.

What was Your Biggest Investment Mistake of 2016? 

A slightly long and involved read for advanced investors, Portfolio rebalancing usually reduces long-term returns but is good risk management anyway

This holiday season, good-to-know tips for how you can save money on travel

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Should you be investing in ELSS funds? Answer these 3 questions to know


As we approach the last quarter of this financial year, chances are that you have seen multiple advertisements promoting ELSS funds and why you should invest in them. While investing in ELSS funds is definitely a good idea for many investors, a lot of this marketing goes overboard in selling you the idea that ELSS funds are the best investment you can make. A large part of this has to do with the fact that your distributor will earn fat commissions if you buy ELSS funds irrespective of whether it is the right investment for you or not.

In this article we aim to demystify ELSS funds and who are these funds suitable for. With our 3 question checklist, you can make an informed decision on whether this is the right investment for you or not.

  Sign up to start buying Direct ELSS Funds >>


What are ELSS funds?

ELSS stands for Equity-linked Saving Scheme. ELSS funds are equity mutual funds. Period. Before going into the tax benefits etc associated with these funds, the first thing that any investor thinking of investing in ELSS funds should realize is that they are investing in equity funds. Within equity funds, ELSS funds are most like large-cap funds with some mid/small cap flavour.

What is special about ELSS funds?

Any investment in ELSS equity funds is exempt from income tax under Section 80C of the Income Tax Act. So it can be deducted from your income before calculating taxes. This is subject to a cap of Rs 1.5 lakh on the investment amount. So if you are somebody in the 30% tax bracket (taxable income above 10 lakhs) then you can save Rs 45,000 (= 30%*1.5lakhs and excluding education cess) by investing Rs 1.5 lakhs in ELSS funds. For those in the 20% and 10% tax brackets, they can save Rs 30,000 and Rs 15,000 respectively. To enjoy this tax benefit, there is also a lock-in of 3 years. During this period any gains are tax free and the withdrawal amount after 3 years is also tax-free. Aa result ELSS is classified as an EEE investment - Exemption from tax of investment amount, Exemption from tax of gains and Exemption from tax of withdrawal amount.

Should you invest in ELSS funds?

To decide whether you should invest in ELSS funds and in what proportion, you need to answer 3 questions. If the answer to all these three questions is YES, then you should consider investing in ELSS funds.

#1: Do you have any investment limit left under Section 80C?

Apart from ELSS, there are several other forced savings/common expenditures which are eligible for deduction under Section 80C. Some common ones are:
1. Contributions to Provident Fund/Voluntary Provident Fund
2. Payment towards repayment of principal amount on Home Loan
3. Children's education expenses
4. Life insurance premium
Before thinking of making investments such as ELSS under Section 80C, you first need to check what proportion of your 1.5 lakh limit is already getting exhausted by these other routes.

Our research shows that the performance of ELSS funds is pretty much in line with that of other non-ELSS equity funds. Hence if you are already exhausting your 80C limit through other expenditures then it does not make sense to invest in ELSS funds since you will have an unnecessary 3 year lock-in period which does not exist with other equity funds. Gains on equity funds are as it is tax-exempt after 1 year investment.

#2: Are you willing to say invested for the long term?

I have seen many ELSS ads touting the twin benefits of high expected returns (~15%) and low lock-in period (3 years) compared to other 80C investment options. However this is misleading. Unless you turn out to be quite lucky in terms of timing your investment, you may not be able to enjoy both of these benefits. Performance of equities and consequently equity funds is notoriously difficult to predict. Equities have the potential to give double digit returns over the long-term (say 7+ years) but performance can vary a lot from one year to next and even over 3 year periods.

Hence you should consider investing entirely in ELSS funds only if you have an investment horizon of 7+ years. For investment horizons between 3 and 7 years, you should consider investing in a some combination of interest-paying debt investments eligible under Section 80C and ELSS. Even though your expected returns will be lesser, you will have a much higher probability of getting positive returns at the end of your investment horizon.

One thing that I would like to add here is that apart from ELSS, the two other 80C investments which are also EEE (and hence are the most beneficial) are PPF and Sukanya Samriddhi. Unlike ELSS, both are fixed return investments but you can only invest in them if you have a long investment horizon since they have long lock-in periods of 15 years and 21 years respectively. As a result, to get the maximum benefit from your 80C investments it is recommended that you should use the 80C bucket for long-term goals like retirement. This way you can invest unhindered in the EEE investments such as ELSS and PPF and get maximum tax benefit.

#3: Can you stomach the risk in equities?

While it is true that if you invest in equities for the long-term, you can significantly increase your changes of double-digit returns but you may still have to sit through significant ups and downs in the meantime. Not everyone has the risk appetite to do that. If you are someone who will panic an sell your ELSS investment early if they are down 20%, then you are again better-off holding a combination of ELSS and debt investments eligible under Section 80C rather than entirely in ELSS.

Distributors get commissions for selling ELSS funds while nobody gets anything if you invest in PPF (say). That is one big reason why we see extremely rosy picture being painted for ELSS investments. You need to start looking beyond ads and see if your answer to the above the 3 questions is Yes. Its only then that you should invest 100% of your (residual) 80C limit in ELSS funds. Else opt for some combination of ELSS with other 80C investments.

Also if you decide to invest in ELSS funds, also way invest in 0-commission funds. You can save an additional 6000Rs by not paying commissions.

ORO Weekend Reads: 12 - 17 Dec 2016

This week in ORO Weekend Reads: Invest in these ELSS funds to save Rs 51,000, what does the Fed rate hike mean for your portfolio and why you should ignore all year-end investment lists. Also you can now do a SIP in bitcoins!

So grab a cup of coffee and enjoy our personal finance reading list, specially curated for you.

ORO Wealth Exclusives

In the tax saving season,  Why save only 45000 when you invest in ELSS, save 51000 instead!

Relevant in the new year,  Top 10 investment ideas to beat low FD rates

From the News 

Fed has hiked rates. See What the Fed's changing dot plots mean for an international perspective. Closer home, Wealth managers prefer short-term debt products now and Mutual fund managers increasing investments in large cap stocks

It is good to pick the right mutual funds, but it is also important to know How to review your MF investments

If you are into stock picking, here is a pretty comprehensive list of The stocks you should buy to bet on digital India

Life insurers set to cut returns on guaranteed plans following the fall in interest rates post demonetisation

See Time to get proof of investment in order for a good discussion of the mechanics of claiming 80C deduction

Around the Web

Private e-wallets may be doing a lot of publicity but see here, here and here for why UPI may be better

Why you need to take investment outlooks for 2017 with a pinch of salt. Also see No, don't buy those 'best stocks to own in 2017'

And this is not a joke, you can now start a SIP in bitcoins

Hope you enjoyed reading! Subscribe to our newsletter to receive it directly in your inbox every week.

Why save only 45000 when you invest in ELSS, Save 51000 instead!

Investors are always interested in finding out about the top ELSS funds to invest in. However one low-hanging fruit is to invest in direct plans of ELSS funds which can give a guaranteed increase in returns.



How you can save taxes with ELSS funds

First a quick recap of how you can save upto Rs 45,000 by investing in ELSS and other 80C eligible instruments. Section 80C of the Income tax act allows you to claim a deduction of up to 1.5 lakh in your taxable income if you invest in eligible instruments. For those in the highest tax bracket of 30%, this works out to be saving of 45,000 in your tax bill. Here is the calculation:

Even for those in the lower tax brackets of 10% and 20%, savings turns out to be 15000 and 30000 respectively.
However did you know that if you are investing in ELSS funds, you do not need to be satisfied with just a saving of 45000, you can save 6000 more to take your total savings to 51000. Repeating the above calculation in reverse, an additional saving of 6000 is equivalent to having  80C limit of 1.7 lakhs for somebody in the 30% tax bracket. 

Save more by investing in direct plans of ELSS funds

So how to save an additional 6000 Rs? Simple. Buy only direct plans of ELSS funds. Every mutual fund has two plans: regular and direct. These plans are same in every respect but in regular plans you have to pay commissions every year while direct plans are 0-commission. Since ELSS funds have a lock-in of 3 years, if you choose to buy a regular ELSS fund today you will be paying commissions for 3 years.

Read more: Earn higher returns by investing in direct plans of mutual funds

ORO looked at the performance of all 33 ELSS funds which existed 3 years back on 1st December 2013. Our calculations show that if you had invested your entire 80C limit of Rs 1.5 lakhs in direct plan instead of the regular plan, on an average you would have saved a total of Rs 6000 in commissions.

Also if you look at the ELSS fund industry, then nearly 85% of the money is managed by just 10 funds (as of Oct 2016). In the table below we show the commissions that you could have saved in each of these funds by going direct. The largest ELSS fund is the Axis Long Term Equity Fund which alone has 23% of the total ELSS money (as of Oct 2016). Investors in Axis could have saved 11000 in commissions by just choosing the direct plan.


Stop leaving Money on the Table

So are there any disadvantages of going direct? Some people say that you lose out on the valuable “advice” which the commission-earning middleman provides you. But given the high commissions involved in ELSS funds, you need to be particularly careful about mis-selling.

You are much better off: 1) Doing your own research or 2) Going with a fee-only planner who will advice you on the right ELSS fund to buy for a fee and then get you invested in direct plans.

We at ORO enable investors to buy direct plans of different mutual funds conveniently at one place. We also provide our top picks in ELSS funds (and other categories). You can check our top pick by creating a simple login here.

Start investing in direct plans today and stop leaving your hard earned money on the table.

ORO Weekend Reads: 5 - 10 Dec 2016

With the tax saving season here, this week read about how you can increase your ELSS returns and how to invest in the Sukanya Samriddhi Scheme. Also find out how you can invest like Warren Buffet and 52 things from 2016 that you probably did not know about.

Welcome to ORO Weekend Reads - your essential weekly reading list in personal finance.

ORO Wealth Exclusives

Read why you should be particularly  Beware of mis-selling in Tax Saving (ELSS) funds

From the News 

Looking to invest in debt products under 80CC? Those with young daughters should definitely read All you need to know about the Sukanya  Samriddhi Yojana and how to open a Sukanya Samriddhi Account

One month on from 8th Nov, here are the 6 things that have changed since demonetisation. Also see this chart on the Impact of demonetisation on stock market valuation.

New to digital payments? Make sure your money remains safe. Read this, this and this.

How anyone can invest like Warren Buffet, read a short summary or the full longform article.In similar vein, The best investors in the world aren't special.

Around the Web

How much do the richest 1% in India earn and spend

The mis-selling problem remains the same everywhere 5 things your Life Insurance agent may not tell you

It works but Diversification is not fun

And our fun read for the week, 52 things that I learnt  in 2016

Hope you enjoyed reading! Subscribe to our newsletter to receive it directly in your inbox every week.

ORO Weekend Reads: 28 Nov - 3 Dec 2016

This week read about the top 10 investment ideas to beat lower FD rates, how November changed financial markets in India and the world and how can you stay safe in the fast emerging world of digital payments.

Welcome to ORO Weekend Reads. Staying on top of your personal finances has never been this easy. So what are you waiting for? Grab a cup of coffee and get started.

ORO Wealth Exclusives

Check out our Top 10 investment ideas to beat lower FD rates

Also read What are the top 6 things you should look for in your financial advisor

From the News 

With demonetisation and the Trump election, November was an eventful month indeed. A good recap of how markets changed this month

Payment banks are the latest digital payment mechanism to have come up. Here is how to make the most of payment banks. Also read about the benefits being offered by Airtel - the country's first payment bank

Are you sceptical of digital payments? These three articles may make you more comfortable, see Cashless payments for digi-sceptics, Use these 4 tricks for hassle-free swiping and What to do if your UPI app encounters technical gliches

Tax man is in the news for the wrong reasons but why not think about happier times when you will need an income tax refund?  Useful info to file for the future:Here is how to claim a fast income tax refund and Have you got interest on your refund.

On a less serious note, Can booking air tickets very early really save you money?

Around the Web

A long read but highly relevant for long-term investors, The Right Way to Gauge Investment Returns

Do you invest in stock markets? Then you absolutely need to read about the Kelly criterion

Two useful blogs for those contributing to EPF, How to track EPF claim status online and A step-by-step process to resolve duplicate UAN

Hope you enjoyed reading! Subscribe to our newsletter to receive it directly in your inbox every week.

Top 10 investment ideas to beat low FD rates

All major banks have cut their FD rates so that they are now below 7%. Banks which have not cut rates till now are expected to do so soon. FDs are perhaps the most popular investment avenue in India and any cut in rates is therefore bad news for savers.
We have compiled the following top 10 investment ideas which can help you protect your returns:

#1 Small Savings Schemes: such as Post Office Schemes and National Saving Certificate: This is for the most risk averse investors. It is important to note that interest rates on these investments are now market-linked so they will also come down soon. However the rate applicable for the Oct-Dec quarter was fixed in September when rates were still high. As a result investors can still invest and lock-in the high rate till December.
Update: Despite the fall in market interest rates, the Government has left the interest rates on various small savings schemes unchanged for the quarter of Jan-March 2017 extending the opportunity for retail investors to lock-in these higher rates.
It is important to note that the rates offered on Post Office Schemes, Senior Citizen Savings Scheme and National Savings Certificate can be locked today for the entire tenure of these schemes. In the case of PPF and Sukanya Samriddhi Yojana will keep getting revised, so if you invest in these schemes you will only be able to get high rates for the current quarter.
While investing do keep in mind that investments in these instruments are relatively illiquid as there are penalties for early withdrawal.

#2 Liquid Funds: Many savers in India tend to stick to bank deposits dividing their saving between the saving account and FDs. Over the last 10 years (according to RBI data), savings accounts have  returned c. 3.8% p.a. and FDs have returned c. 8.25% p.a. Now that FD rates have come down, investors can still maintain their returns by introducing Liquid funds into the mix.
Liquid mutual funds are nearly liquid as your savings account but have returned 7.84% (category average, Morningstar) over the last 10 years – so 2x your savings account!

Read more: Why Liquid funds are like bank deposits or even better

As interest rates in the country have come down liquid funds will also return less than what they have in the past. As an estimate, in the last 10 years Liquid funds have returned about 0.5% less than FDs. Now that FD rates are in 6.5-7% range, we should expect liquid funds to return around 6-6.5% . 
However 6-6.5% is still significantly more than the bank savings account interest rate. By shifting some of the money that you maintain in your savings account to liquid funds, you can ensure that your overall returns remain the same even if FD rates have come down – and this without compromising on liquidity.

To see ORO’s top picks in Liquid Funds click here

#3 Arbitrage funds: These are mutual funds which use equities and equity futures contracts to give returns which are extremely similar to liquid mutual funds. Over the last 10 years, the average arbitrage fund (category average, Morningstar) has returned 7.74% p.a.  However the catch here us that because arbitrage funds are invested in equity instruments, they are taxed like equity mutual funds. This means that dividends are tax free, short-term capital gains are taxed at 15% and long term capital gains are applicable after 12 months and are 0. In contrast, FD and savings deposit interest is taxed added to investor’s income and taxed at applicable income tax rate. Hence to do an apples-to-apples comparison, for somebody in the 30% tax bracket, if they hold an arbitrage fund for 12 months then a 7.74% return is like earning 11% on your bank deposit.
Despite the significant advantages offered by arbitrage funds, many retail investors stay away from them because they don’t think they understand the strategy by which these funds earn debt-like returns. Yet now is a good time to learn about them because together with liquid funds, arbitrage funds can add a lot of value to your portfolio.
However do note that like liquid funds, arbitrage fund returns will also be lower going forward – around 6 – 6.5% post tax or 8.5-9% pre tax.

To see ORO’s top picks in Arbitrage Funds click here

#4 Non-convertible Debentures/Corporate Fixed Deposits: When you make a FD, you are essentially lending money to your bank. With NCDs and Corporate FDs you lend money to a company. Because lending to companies is considered to be more risky than banks, therefore such instruments pay higher interest rates than bank FDs of similar maturity.
However do not believe anybody who tells you that this increase in interest rates that you get is risk-free. At the end of the day, there is a very real default risk which exists with lending to companies and which does not exist with bank FDs.
As a result while investing in such instruments, investors need to do adequate research and also be familiar with the terms of the instrument that they are investing in. It is also desirable to diversify i.e. hold instruments of different companies so that you are not unduly affected by bad news in a single company. If you are not sure whether you can do all this work, then you can consider investing in mutual funds where a professional fund manger does this job (See #6)

#5 Tax-free Government bonds: These are bonds that are issued by government-backed entities on which the interest is tax-free. Though the interest rates on these bonds are also slightly lower because of the tax-free status, typically for people in the 30% tax bracket the post tax returns work out to be higher than FDs. Due to an economy-wide lowering of interest rates, yields on tax-free bonds have already come down, but they may still give slightly higher returns than FDs for those in the higher tax brackets. While investing in tax-free bonds, it is important to note that the liquidity in these bonds is quite low, so you should be prepared to hold them to maturity. Alternatively investors can also consider long-term gilt funds (See #7).

#6: Debt mutual funds - Short-term: At the end of the day, if you want to earn more returns than FDs, then you would need to take more risk. Debt funds help you to do that. In particular, there are two kinds of risk that debt funds take  –
First is credit risk i.e. they can hold more risky debt instruments such as the NCDs we saw earlier. These instruments have a greater risk of default and hence they pay higher interest rates to compensate for that.
Second is interest rate risk i.e. they hold instruments have a long time to maturity. Whenever interest rates come down (up), prices of bonds go up (down) but this effect is dependent on the average maturity of debt. Debt funds which hold debt with a long time to maturity react more to interest rates and hence have more interest rate risk.
Read more: Bonds and debt funds explained through a simple analogy with FD

So one idea for investors is to invest in short-term funds (hold debt instruments with 3-5 years to maturity) which take credit risk but where interest rate risk is relatively lower. These funds go by many names such as income funds/accrual funds/credit opportunities funds etc. They will give good returns ( and do better than FDs) as long as the underlying companies whose bonds they hold do ok and do not default.

To see ORO’s top picks in Income funds click here

#7 Debt mutual funds – long term: Following the discussion in point 6, the second type of debt funds that investors can hold is those that take significant interest rate risk but low credit risk. These are the Long-term gilt funds. They hold government bonds (so almost no risk of default) but with long time to maturity like 7 to 10 years.
These funds will do extremely well if interest rates come down. Infact post demonetisation, as FD and other interest rates have come down these mutual funds have been top performers.
As long as your expect interest rates to continue falling or at least not rise substantially, it can be a good idea to allocate a part of your portfolio to Long-term Gilt funds.

To see ORO’s top picks in Gilt funds click here

#8 Equity Mutual Funds: Investors willing to take more risk can invest in equity mutual funds. Typically when interest rates come down, equity markets do well as both consumers and businesses are able to borrow on more favourable terms. First time investors can look at large cap diversified funds which invest in the biggest companies on the stock exchange and are hence considered to be the safest among equity funds.

To see ORO’s top picks in Equity funds click here

#9: A combination: One main takeaway from our discussion here is that if you want to earn returns above FDs than you will need to take more risk. You can either take credit risk or interest rate risk or equity risk. But why put all your eggs in one basket? You can do better by diversifying across these different kinds of investments.
At ORO we have built portfolios using these different kinds of mutual funds which can give you 8-10% returns for the lowest amount of risk. Further these portfolios are constructed using direct mutual funds so you do not pay any commissions and get to keep all of your returns.

You can check out ORO portfolios here.

#10: Our last investment idea is about what to avoid. A lot of investors may be tempted to buy debt-oriented balanced funds. These are mutual funds which invest in both debt and equity but mainly in debt. They are often marketed as a way to earn debt-like returns but with an equity kicker. However it is rarely a good idea to buy such products because they give you debt fund-like returns with equity fund-like expense ratios (or expenses that a mutual fund charges). This unnecessarily brings down returns. Investors are usually much better off building their own portfolios buy buying equity and debt funds separately.