Invest In India

Investment options to Save Tax under Section 80C

Tushar Mathur — Tue, 09 Feb 2010 05:57:00 +0000

No one likes paying tax and it prompts everyone to look for options that may reduce their tax liability. There are many provisions to do this and one of the most common options is the tax deductions under Section 80 C of the Income Tax Act. There are various investing options under 80 C that enable you to reduce your taxable income up to a maximum limit of Rs 1 lakh.

The eligible deductions that everyone might be aware of are contributions to Employee Provident Fund, Payment of tuition fee or repayment on home loan. In addition there are investment avenues that are eligible for tax deduction about which you might have little knowledge.

Investing in Government Securities

For those who seek absolute protection of their capital, Investing in Postal Saving schemes such as NSC or putting money in PPF (Public provident fund) is an option.

Public Provident Fund (PPF)

PPF offers interest income in the range of 8% with annual compounding. However, the maximum amount that can be invested in PPF is Rs.70,000 and money cannot be withdrawn before the completion of 6 years. Those who look at PPF in terms of their retirement corpus and feel that their current PF deduction is not sufficient, may consider this option.

National Savings Certificate

Another popular avenue investing – NSC also offers a return of 8% on half yearly compounding basis. Another feature is that interest accrued on NSC is also eligible for Section 80 C benefit. The interest on NSC investment, except in the sixth year, is not paid but credited to the investor’s account. So, the interest that accumulates is treated as invested in NSC and the accumulated interest thereby qualifies for tax deduction. The duration of NSC is for 6 years with an option of premature encashment after 3 years. However, that would reduce the net yield from NSC.

Tax saving FD’s

This is a relatively new kid on the block. Tax saver fixed deposits are issued by banks for a tenure of 5 years and premature withdrawal is not permissible. It generates interest income of 8% with quarterly compounding. The interest income is taxable. If we compare tax saving FD’s to NSC, Tax saving FD’s have an edge on lock in period which is lesser by one year. However NSC have an edge from the fact that interest accrued is also eligible for 80 C limit for the first five year.

Investment in Equity linked Saving Scheme(ELSS)

ELSS are funds invested primarily in equity shares of companies. They have been in limelight for their superior performance in the recent past and are a popular tax saving investment. Due to their tax saving nature, they are also known as tax saving mutual fund schemes. Like all investment avenues under Section 80C, ELSS funds also involve a certain lock in. In this case the lock in is for three years which means that they cannot be withdrawn for a period of three years from the date of investment. The ELSS Fund manager basically invest 80% of the total amount in the equity shares and the remaining 20% is invested in other instruments like bonds, debentures, government securities and others.

However the basic risk with ELSS scheme is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital. At the same time, ELSS can also be seen as a way to long term investing in equity markets and with India growth story unfolding and fundamentals looking intact, investment experts anticipate that equities would continue to outperform other investing avenues for at least next 5-7 years. Investing in ELSS provides dual benefit of capitalizing on superior returns as well as tax saving. With the current market turmoil avoid this instrument unless you are looking for a long term investment. If that is the case look for good fund managers with stellar tax records.

Life Insurance and Tax savings

As far as life insurance is concerned, endowment plans (money back plans) have been a popular source of investing.There are various long term life insurance policies which give you good returns, tax savings under 80C and an insurance cover as well.

ULIP’s have taken a center stage now since they offer insurance as well as market related returns in a single product. However, investors should understand the underlying structure of ULIP carefully since these offerings have a substantial charge towards expense in the initial years and is advisable only for investors with a large investing horizon. Avoid ULIPs if you do not like to risk money. Also invest in ULIPs with a long term horizon of a minimum of 10 years.

Another avenue within insurance domain is Pension plans. Pension plans have got a boost in last finance bill with the overall limit raised from Rs. 10,000 to Rs. 100,000. Senior Citizen Saving Scheme 2004 and Post Office Time Deposit Account have also been included in Section 80 C.

However some people may be biased towards other investing options as compared to Life Insurance products since they may prefer insurance and investments separately.

Infrastructure development Bonds

With a return in the range of 5-6% this is the last avenue a tax saver would resort to. The dismal returns provided by these bonds have resulted in the investors shying away from these bonds. The return is hardly good enough to fight inflation, leave alone wealth creation.

So investing in any of the above avenues would help you reduce your taxable income by a maximum of Rs 1 lakh, irrespective of how much you earn and under which tax bracket you fall.

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Investment options to Save Tax under Section 80C

India Stocks Fall on Lower-Than-Expected Offers for NTPC Shares

Tushar Mathur — Tue, 09 Feb 2010 05:50:00 +0000

Indian stocks fell the most in a week, led by construction companies, on concern the government will raise less than expected from share sales to fund infrastructure and after it postponed the sale of mobile phone licenses.

Jaiprakash Associates Ltd., a builder of dams and roads, slumped to the lowest in three months after investors offered the government lower prices than forecast for equity in NTPC Ltd., a power producer. The delay of an auction of third- generation mobile phone licenses that would help fund the government’s deficit contributed to the drop. Bharti Airtel Ltd. sank 1.6 percent.

“Investors are concerned about how the government will address the fiscal deficit on a sustainable basis,” said Mohit Mirchandani, who helps manage $127 million at Taurus Mutual Fund in Mumbai. “That concern has increased after the 3G auction delay.”

The Bombay Stock Exchange’s Sensitive Index, or Sensex, fell 271.10, or 1.6 percent, to 16,224.95, the steepest decline since Jan. 27. The S&P CNX Nifty Index on the National Stock Exchange lost 1.8 percent to 4,845.35. The BSE 200 Index also retreated 1.8 percent to 2,055.29.

Jaiprakash slipped 4.5 percent to 131.2 rupees, its lowest close since Nov. 3. DLF Ltd., India’s biggest developer, slid 4.4 percent to 321.35 rupees.

Government Target

Investors offered to buy only 80 percent of the 412 million NTPC shares that went on sale yesterday, according to data on the National Stock Exchange Web site as of 4 p.m. today. Offers ranged from the 201 rupees minimum per share to a maximum 210 rupees.

The NTPC share sale’s “overall collection will be 10 to 15 percent lower than what was expected,” said Ambareesh Baliga, vice president of equities at Karvy Stock Broking Ltd. in Mumbai. “The earlier expectation was that the offer would happen at a higher level.”

NTPC, India’s biggest power generator, declined 1 percent to 207.7 rupees.

The government aimed to raise more than $2 billion from the sale of 5 percent of NTPC’s shares, according to JPMorgan Chase & Co., one of the banks helping to manage the offer.

Prime Minister Manmohan Singh’s government, which owns 89.5 percent of the New Delhi-based utility, is accelerating the sale of stock in state-run companies to help plug the fiscal deficit and take advantage of an 81 percent advance in the nation’s benchmark stock index last year.

Budget Gap

The share sales may help India boost economic growth by increasing spending on infrastructure and trimming the budget shortfall, forecast to reach a 16-year high of 6.8 percent of gross domestic product by March 31.

State Bank of India led a decline in lenders as a government report today showed the nation’s food inflation accelerated for a second week to near an 11-year high, fueling expectations the central bank may raise borrowing costs after last week ordering lenders to set aside more cash reserves.

“Inflation is a big problem,” Kevin Grice, an economist at Capital Economics Ltd. in London, said before the report. “A hike in policy rates is still imminent.”

State Bank, the largest lender, declined 2.6 percent to 1,947.9 rupees. Housing Development Finance Corp., the biggest mortgage lender, lost 3.9 percent to 2,418.5 rupees. ICICI Bank Ltd., the country’s second-biggest lender, fell 1.3 percent to 828.8 rupees. Axis Bank Ltd., the fourth-largest lender by market value, fell 2.1 percent to 1,048.45 rupees.

Inflation

Consumer-price inflation in India is the highest among Asia-Pacific countries, according to Bloomberg data.

Bharti Airtel, India’s largest mobile-phone operator, fell 1.6 percent to 304.1 rupees. The government may not hold the auction of 3G licenses by March 31, Finance Secretary Ashok Chawla said yesterday, without giving a new date. The auction would be completed before April 1, Communications Minister Andimuthu Raja said on Jan. 19. The government in October set Jan. 14 as the tentative deadline to start taking bids for the airwaves.

Reliance Communications Ltd., the second-largest mobile- phone operator, retreated 3.7 percent to 164.8 rupees. The stock was downgraded to “reduce” from “hold” at Emkay Global Financial Services Ltd.

Infosys Drops

Software stocks declined after a report showed the U.S. services industry expanded less than forecast. The Institute for Supply Management’s index of non-manufacturing businesses in the U.S., which make up almost 90 percent of the economy, rose to 50.5, lower than the median economist estimate of 51 in a Bloomberg survey.

Infosys Technologies Ltd., the second-largest software services provider, lost 1.8 percent to 2,429.05 rupees, while larger rival Tata Consultancy Services Ltd. plunged 1.9 percent to 738.7 rupees. Wipro Ltd., the No. 3, fell 2.5 percent to 655.2 rupees. The U.S. accounts for 40 percent of India’s software sales.

Indian state refiners gained after a government-appointed panel recommended that prices of gasoline and diesel be freed, easing their losses from selling fuels below cost. Indian Oil Corp. rose 0.3 percent to 316.8 rupees. The stock had earlier soared as much as 5.1 percent. Bharat Petroleum Corp. gained 0.5 percent to 583 rupees, paring its earlier advance of as much as 3.4 percent.

Tata Motors Falls

Tata Motors Ltd., India’s biggest truckmaker and owner of Jaguar Land Rover Ltd., lost 4.4 percent to 689.6 rupees and Mahindra & Mahindra Ltd., the largest maker of sport-utility vehicles and tractors, slid 3.5 percent to 1,017 rupees after the government-appointed panel recommended additional duty on diesel-powered vehicles.

“That is a concern,” said Umesh Karne, a Mumbai-based analyst at BRICS Securities Ltd. “Tata Motors is the biggest maker of diesel-powered passenger vehicles in India and the additional duty, if implemented, could dampen sales.”

Overseas funds bought a net 109 million rupees ($2.35 million) of Indian stocks on Feb. 2, paring their outflows this year to 3.41 billion rupees, the Securities and Exchange Board of India said on its Web site.

Foreign fund flows into India’s stock market rose to a record 834.2 billion rupees in 2009, beating the previous high set two years earlier in local currency terms, as the biggest rally in 18 years lured foreign investors.

©2009 Copyright by Invest In India
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India Stocks Fall on Lower-Than-Expected Offers for NTPC Shares

RBI Call on Debt Funds to Hurt Indian Funds

Tushar Mathur — Tue, 09 Feb 2010 05:44:00 +0000

Heightened scrutiny by India’s central bank on debt investments by the country’s banks will take a toll on the domestic mutual fund industry’s asset growth, with banks set to shrink their fund holdings.

In recent weeks, the Reserve Bank of India has ratcheted up its rhetoric on the potential risk posed by the so-called circular trade between banks and mutual funds, where banks invest excess cash in debt funds while fund houses use a large portion of these debt fund proceeds to invest in banks’ certificate of deposits.

The central bank, in a private note issued to banks has asked banks to act as “self regulators” on their debt fund investments, three people familiar with the matter had told Dow Jones Newswires in mid-December.

Certificates of deposits are short-term instruments used by banks to raise funds.

While banks generally cut their mutual fund assets exposure at the end of each quarter to meet capital adequacy requirements, industry experts expect future data to show that the RBI’s moral suasion is having some impact.

Mutual fund assets in the quarter ended Dec. 31 were down 19% at 6.65 trillion rupees ($143.7 billion) from a record high of 8.22 trillion rupees at the end of November. However, the funds are generally reinvested in the beginning of the following month.

“Some of the investments (by banks into debt funds) may not come back. We are already seeing that in January the amount of money coming back is lower,” U.K. Sinha, chairman and managing director of UTI Mutual Fund, India’s oldest and fourth largest fund house.

Bank investments into mutual funds rose to as high as 1.69 trillion rupees as of Dec. 4 from 319.20 billion rupees in late December 2008, data from the central bank shows. Debt fund assets–which include income funds and liquid/money market funds–make up the bulk of the banks’ investments and accounted for 66% of the mutual fund industry’s total assets at the end December.

Even though the RBI has not issued a prescriptive directive on the issue, the central bank’s exhortations to banks to self-regulate could well spur a further downsizing of bank’s inflows into debt fund schemes, some bank treasury officials and industry experts said.

At least four fund managers and bank treasury heads who declined to be named said in total, debt mutual funds held by India’s banks could shrink by between 30% and 40%.

“There’s always the risk that if banks don’t scale back, the RBI may do something drastic such as changing the capital adequacy norms to a period-average basis, from the current ‘end of the quarter’ basis,” said Ashutosh Khajuria, treasury head at IDBI Bank, noting that banks will prefer to cut debt fund holdings than risk a showdown with the country’s central bank.

For its part, the RBI’s concern is the interdependence of banks and mutual fund houses in India.

Banks’ dependence on certificates of deposits purchased by mutual funds poses a significant rollover risk which banks must be mindful of, RBI deputy governor Usha Thorat said recently. Banks, meanwhile, tend to withdraw liquidity en masse, increasing the danger of a run on mutual fund assets, Ms. Thorat noted.

The increased central bank scrutiny comes at a time when banks, despite a recent revival in credit, are flush with deposits and cash, meaning that the limitations on debt fund investments may force banks to increase lending, affecting risk. Otherwise, banks may deposit a larger amount of cash in low-yielding central bank reverse repo window, a move that would affect earnings.

Under the reverse repo window, banks park their surplus cash with the central bank at the overnight rate of 3.25%.

After dipping to as low as 9.5% in late October, loan growth for Indian banks rose 13.9% year-on-year in the two weeks ended Jan 15. It, however, lagged the 16.8% growth in deposits, and still remains below the RBI’s twice-reduced forecast of 16% growth for the fiscal year.

©2009 Copyright by Invest In India
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RBI Call on Debt Funds to Hurt Indian Funds

The benefits in tax for NRIs in Budget this year

Tushar Mathur — Mon, 08 Feb 2010 04:37:52 +0000

The Finance Minister has announced an increase in income tax exemption of Rs 10,000. This includes the Indian citizens as well as the NRIs. He also announced hike in Rs15, 000 for the senior citizens. Over the world-wide income of the NRIs the government has imposed 5% income tax on Non Resident Indians (NRIs). To avoid the double taxation the income that has been already taxed in India kept out of the purview.

For this 5% tax there would no benefits of the double taxation be available. This means that if you are even paying the tax on your income in a country with which India has the agreement of double taxation, then there benefits would not be allowed against the 5% tax. The NRIs and all the Indians who are holding the Indian Passport and have been living out of the country for more than 180 days are under this requirement.

The proof of the income would have to be submitted in the form of employer, foreign tax fillings etc. As a data sharing initiative on the terror prevention measures, the government of India is also coordinating with the Australia, America, Europe, UAE and the other countries for collecting the Income data of its citizens. This all is done as bringing in the compulsory participation in the development of India from NRIs.

This shows that the NRIs can not continue to retain their citizenship of India without paying taxes in India. It is possible that this may not be the favorable in the views of NRIs who are already bringing the substantial FOREX in the form of investments and the remittances. This caused a lot of heart burn for the outside residing Indian communities and this move is expected to generate the tax collection of approximately 10 million INR for the government this year.

The Finance Minister has scrapped the FBT, allowances and the tax on perks that are offered by the companies. Besides the budget has done way with the 10% surcharge on the personal income tax over the income of over Rs 10 lakh.

©2009 Copyright by Invest In India
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The benefits in tax for NRIs in Budget this year

Ways to build emergency funds for NRIs

Tushar Mathur — Mon, 08 Feb 2010 04:36:31 +0000

The best way to avoid the financial disaster or the jobless situation is to create your emergency fund. As the life is unpredictable and the events like this may strike anytime. The emergency fund is typically used for covering the unexpected requirement of cash. This is usually sought in the dire straights because of some undesirable situations. The people have raided the emergency funds for the other uses like an impromptu vacation, to use as a home’s down payment or as a wild shopping spree.

This is not the bad thing for NRIs at all. If they are able to replenish their fund easily then it does not matter how many times they end up accessing and using their cash. The emergency fund ensures that you have a liquid cash source when you need it the most. You can be in fine shape if you make sure that this liquid cash source exists for you at all times regardless of how the emergency is defined by you.

An emergency fund ascertains the monthly living expenses. There are many methods and strategies are being used by the many persons and the NRIs to build some kind of the emergency fund.

Find out the investible surplus- To build up an emergency fund first you need to find out your investible surplus. This means you should budget your all the incomes receivable and the expenses that are incurred regularly.

Two in one savings accounts- To create the emergency fund the NRIs must get their salary credited directly to a two-in-one account. The day-to-day expenses should be credited either to a cheque or credit card of the operable account. And as possible the other operable part of account should not be easily operable.

Liquidity of cash- The high liquidity is the key for the emergency funds and flexi deposits score high on this front. The flexi deposits are the combination of a saving account and a fixed deposit. The NRIs got benefits from interest rate of a fixed deposit and the flexibility of the savings account.

©2009 Copyright by Invest In India
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Ways to build emergency funds for NRIs

Banks report surge in Casa ratio as against fixed deposits

Tushar Mathur — Thu, 04 Feb 2010 11:24:00 +0000

In the past few months term deposit rates have lost sheen as banks have reduced rates. Now people prefer to park their money in current account savings accounts (Casa) rather than investing their money in fixed deposits for longer duration. Banks have reported a significant rise in their current account savings accounts (Casa) ratio for the quarter ended December 31, 2009.

State Bank of India (SBI), country’s largest commercial bank is the major one to witness surge in the ratio of its Casa. Bank’s Casa surged to 42.94 per cent as on December 31, 2009, against 36.58 per cent in the corresponding period a year ago, thereby registering a growth of 29.94 per cent. Earlier in the same period SBI overall deposits growth stood at 11.26%.

When bank Casa ratio increases its cost of funds comes down. On the other hand HDFC Bank Casa ratio surged close to 49 per cent as on December 31, 2009, as against 40 per cent as on December 31, 2008. And, as of December 31, 2009 the savings account deposit of HDFC Bank stood at Rs 46,696 crore, registering a growth of 41.2 per cent over December 31, 2008, whereas current account deposits amounted to Rs.33,276 crore as of December 31, 2009, a growth of 37.2 per cent over December 31, 2008.

Ashish Parthasarthy, head of treasury, HDFC Bank, said, “We traditionally have the highest Casa ratio in the industry. Since, the difference in interest rates offered on term deposits and savings are not significant, many people prefer to keep their balance either in current or savings accounts, which is resulting in higher Casa.”

A similar trend was also reported from ICICI Bank, the largest private sector bank in the country. ICICI Bank Casa ratio registered at 39.6 per cent at the end of third quarter of the present financial year as against 27.4 per cent on December 31, 2008 and 36.9 per cent on September 30, 2009.

Regarding savings deposits ICICI Bank reported an increase of Rs 1,736 crore and in case of current deposits it was Rs 3, 581 crore, during the quarter ended December 31, 2009. Besides major players improvement in Casa ratio was also reported from mid-size and smaller banks such as Yes Bank and IndusInd Bank. Improvement in low-cost deposits was also reported from these two banks.

Yes Bank Casa ratio increased to 10.1 per cent at the end of December 2009 from 9 per cent at the end of December 2008.

Rana Kapoor, founder Yes Bank told Financial Chronicle, “Though, our Casa is at 10.1 per cent, the share current deposit is much higher at 80 per cent, which effectively means that 15 per cent of our total deposits are low-cost deposits.”

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Banks report surge in Casa ratio as against fixed deposits

India Inc may lose tax cover on MF investments

Tushar Mathur — Sat, 23 Jan 2010 11:57:00 +0000

Capital markets regulator Securities and Exchange Board of India (SEBI) wants the government to scrap tax benefits for corporates investing in mutual funds (MFs), a proposal, if accepted by the government, could deal a body blow to local asset management companies and other firms.

The regulator has also proposed to the government that the securities transaction tax, or STT, which is levied on buying or selling of stocks and on derivatives trade, should be cut by one-third and that a uniform stamp duty be levied and collected by a central agency.

These proposals have been forwarded to the finance ministry, in the run-up to the Budget, said a person with the knowledge of the proposal. The letter to the finance ministry says, “Tax benefits to corporates investing in schemes of mutual funds may be withdrawn.”

It is not just the capital markets watchdog that is uncomfortable with MF industry’s unhealthy dependence on short-term funds from corporates.

Though this helps fund houses grow their assets and boost valuations, policymakers are worried about the systemic implications of any swift outflow of such institutional funds that could hobble some of the fund houses. This was evident during the second-half of 2008, when the Reserve Bank of India (RBI) had to keep liquidity support open to help MFs meet their redemption obligations.

RBI has also been unhappy at the way banks have been parking their surplus with MFs, which in turn finds its way back to banks. The central bank has nudged banks to restrict their investments in MFs.

Any move, either to do away with the tax benefits or to tweak the tax rates, could hurt the local MF industry whose growth is linked to the flow of funds from corporates. Over 50% of the money that Indian MFs attract for their debt schemes comes from corporate treasuries and banks. According to latest data, the assets under management of the Indian MF industry are a little under Rs 7-lakh crore.

SEBI’s proposal is aimed at putting an end to the rampant misuse of debt schemes of MFs by corporates, who park short-term corporate treasury funds to enjoy a tax arbitrage. While income from their treasury operations attract the corporate tax rate of 33.99% (including surcharge and education cess), treasury investments in debt funds attract a dividend distribution tax (DDT) of only 22.66%.

“If the tax benefit is removed, it will discourage corporates from using mutual funds as a treasury instrument… as we want to develop mutual funds as a vehicle for retail investors to take exposure in the securities market,” said a SEBI official.

Recently, RBI had told banks to go slow on their MF investments. In the last fortnight of December 2009, banks withdrew more than Rs 1-lakh crore from MFs. RBI deputy governor Shyamala Gopinath too had expressed her concerns about tax arbitrage through mutual fund investments.

“Mutual funds’ fixed-income products enjoy certain tax exemptions not available to banks. But this is outside the regulatory purview. However, if these policies introduce any vulnerability in the financial system, there is a need to address this through appropriate macroprudential and microprudential regulations,” Ms Gopinath said at a Fixed Income and Money Market Dealers Association (FIMMDA) meet.

SEBI has also asked the government to drastically reduce the securities transaction tax (STT) on equity transactions, as it increases the transaction cost. The regulator has recommended that STT should be slashed by one-third, as the rate has effectively tripled with the withdrawal of STT as a rebate under Section 88E in the last Budget.

Besides proposing a uniform stamp duty that will levied and collected by a central agency and shared among states based on an agreed formula, SEBI has recommended a goods and services tax (GST)-type concept for stamp duty collection on securities trades.

Market players say that there are several anomalies in the stamp duty, as it is levied by states with each levying different rates for different securities instruments. There are also disputes among states. Transaction costs in India are one of the highest in the world, with government levies, such as stamp duty and STT, accounting for almost 75% of the cost.

SEBI also wants Indian Depository Receipts(IDRs), instruments through which Indian investors can invest in equity shares of foreign companies, to be treated as securities for tax purposes. It has also recommend to the government that IDRs should not be taxed on transfer.

©2009 Copyright by Invest In India
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India Inc may lose tax cover on MF investments

High inflation can reduced your fixed deposit close to zero

Tushar Mathur — Tue, 19 Jan 2010 12:03:00 +0000

Last year all the banks reduced their fixed deposit rates for almost every period. Currently, according to official inflation figure is above 7 per cent which is a bad news. The prices of almost everything are very high. So the returns from fixed deposits might amount to nothing if the current rate levels continued as all the interest earned will be absorbed by price rises.

According to experts investors, who invested in FDs for security of capital, should think more than safety and add should take some risk to earn real returns.

Currently interest rates being offered by leading banks ranges between 6 per cent and 6.5 per cent on one-year deposits and on Thursday the inflation have touched 7.31 per cent. The retail prices are managed by consumer price index is currently around 12 percent and food inflation is just short of 20 per cent.

Sundeep Sikka, chief executive officer, Reliance Mutual Fund stated, “In the current scenario it is an eye opener as money lying in bank fixed deposits is actually money eroding.”

Although banks are offering 6 per cent interest on a one-year deposit but the return earned gets reduced to below 5 per cent in case it comes in income tax range.

Also, in such case the real rate of return, which is equal to nominal rate less the inflation, turns negative. On the other hand, the BSE’s benchmark stock index, the Sensex has earned a compounded annual return of 23 per cent over five years regardless of serious lows.

“In such a case it (FD) is not even covering one against the rising cost of living,” said Surya Bhatia, a Delhi based financial planner. “Investors should look at instruments that can at least cover them against inflation and start taking a little risk.”

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High inflation can reduced your fixed deposit close to zero

Fixed deposits come with more benefits

Tushar Mathur — Wed, 06 Jan 2010 09:20:00 +0000

Fixed deposits (FDs) a traditional investment option has been a vital part of every investor’s portfolio, due to assured rate of return. However FDs have been plain vanilla products with no additional benefits attached to it. Now banks, in an era of competition are offering few packaged deals in order to attract more investors. Few of the interesting deals being offered are:

Insurance: Some banks are offering insurance with FDs but the main product will be the same along with additional benefit. But the insurance will be based on the deposit amount and the tenure.

For instance, one of the bank is offering free accident insurance cover worth Rs 5 lakh on a 3-year deposit of Rs 25,000 carrying an annual interest of 8 per cent. This adds the value to the product.

Most of the banks offer accident insurance only. The insurance amount ranges from, Rs 3 lakh and 7 lakh. But the accident cover will have a lot of clauses. Therefore, your overall insurance needs should not depend on such bundled policies.

Floating rate deposit and reinvestment of interest: Mostly FDs are offered at fixed rates for the specific tenure. But some of the banks and non-banking finance companies (NBFCs) offer deposit schemes at floating rate of interest. For instance, HDFC offers floating rate deposit on which the interest rate is given every quarter.

Then some banks have facility of reinvestment of interest amount at the existing rates. For instance you get Rs 2,000 interest every quarter on your deposit, so the bank will make a new FD with this amount at the existing rates.

No penalty: FDs are made for a fixed tenure. In case depositor withdraws before the maturity, the institution charges a penalty. In such a case, the overall return will come down. For instance a FD was made for three years at the rate of 8 per cent and is withdrawn after one year, the rate available could come down to as low as 5 percent.

Some of the banks have products where the rate of interest is not reduced if FD is broken before the tenure. The investors who look for flexibility, such deposits are beneficial for them.

Time period flexibility: Some of us make FD for a particular purpose such as for purchasing an expensive item on child’s marriage. There can be chances that these plans are postponed and the depositor does not require to extend the tenure of his/her investment. In such a case one option is to let the deposit mature and then reinvest it. But there is no surety that you will get the same interest rate in the future or it will be reduced. Therefore some of the banks have started providing FDs where investor is allowed to increase the time period of investment without major changes in other conditions.

Adding and breaking deposits: A large amount of paperwork is involved in case a person makes multiple FDs of smaller denominations. Usually investors who might need money at various stages in future do such investment, so they do not deposit in bulk and then break the deposit.

To solve this problem banks have introduced products where a bulk deposit is divided into deposits of smaller denominations as per investor’s need.

On such deposits investor earn higher benefits. Also, banks offer facility to add investments easily so that administration does not become a very difficult task.

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Fixed deposits come with more benefits

Banks low-cost deposits share drop to a 10-year low

Tushar Mathur — Mon, 28 Dec 2009 11:35:00 +0000

In the recent times group of pubic sector banks has witnessed drop in their low-cost deposits, the drop is a 10-year low While individuals are preferring bulk deposits and more are depositing more money in fixed deposits, which offered higher interests a year ago.

Also, the opening of customer-savvy private sector banks is responsible for bringing down investments in low-cost deposits (savings and current account balances) at public sector banks.

This year public sector banks, savings and current account balances accounted to 31 per cent of their total deposits, which was 34 per cent in 1999 and was at peak of 38 per cent in 2066, as per the study conducted by Indian unit of London-based investment banking group, Noble.

But among the public sector banks there have been some of the exceptional banks like State Bank of India (SBI) and Bank of Baroda (BoB). SBI accounted increase in its savings and current account balances in its total deposit by 41 per cent at the end of September from 38 per cent in 1999. Although, in 2006 bank savings and current account balances was 48 per cent. While BoB, has witnessed increase of 36 per cent from 32 per cent.

According to an anonymous chairman of a large public sector bank, public sector banks took time in taking on competition from private sector banks such as ICICI Bank and HDFC Bank.

Private sector banks have got hold of salary accounts of companies due to marketing skills that they used in dealing with companies, especially with those having large number of employees, he said.

In 2007 there was rise in expensive term deposits and wholesale deposits of public sector banks’ deposit portfolio as liquidity in banks have got scarce amongst an unprecedented high credit growth, due to home and other retail loans.

In 2007, banks mostly laid stress on grabbing every bulk deposit available, in a bid some of the banks offered interest rates as high as 15 per cent in some instances. At that time the fight for bulk deposits between the banks intensified so much that the then chief executive of Indian Banks’ Association (IBA) had to meet the top officials at SBI on behalf of ICICI Bank.

The IBA official gave the message that the banks should stop increasing bidding for bulk deposits, as there was lack of faith on each other no solution could be found for this.

The ICICI bank low-cost deposits share in its total deposits stood at 13 per cent 10 years ago which has increased to 37 per cent.

While the HDFC Bank low-cost deposits showed high percentage. In September, bank low-cost deposits accounted at 50 per cent of total deposits, which is up from 46 per cent in 1999, although it has come down from 61 per cent in 2005.

Since 2004 HDFC Bank’s low-cost deposits share was above 50 per cent. However none of the banks have been able to achieve 50 per cent and more share of low-cost deposits in total deposits.

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Banks low-cost deposits share drop to a 10-year low