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Fix it For A Secure Future

Fixed income instruments help, support and aid in growth but are not the be all and end all of investing By Kavya Balaji and Ashwini Kumar Sharma Mallika Shankar, a 38-year-old mother of two from Chennai, is, in a way, a typical woman investor. She set up her own business of advertising and promotional strategy in 2001 and has run it successfully since. Even after dealing with irregular income from her business for more than a decade, when it comes to investing, she sticks to fixed deposits (FDs). She says they offer her security and returns as well. I have minimal investment in stocks and no investments in mutual funds (MFs) because I know nothing about them, she admits. Then, of course, there is the fear of loss of capital. Mukesh Dedhia, director, Ghalla & Bhansali Securities, explains: Unlike men, women need to take career breaks and face disruptions in their income. This leads to a sense of insecurity. Srimathi Sundar, 27, a software professional in Bangalore, started working at 21, married at 25 and quit a year later to have a baby. Theres no way shell invest her savings of 5 lakhplus in anything other than FDs. Stocks are very riskyI dont want to lose money since I have a child now to care for, she says. Are fixed income instruments really risk-free? Economics 101 says if there is no risk, there is no return either. Fixed income instruments may appear to be risk-free, but they really arent although the risk level is lower than that of equity and related instruments. There are three major components of this low risk. The biggest of these is inflation risk. Five years ago 100 would have bought you a movie ticket and a tub of popcorn. Today, youd be lucky even to get the popcorn. So, unless investments earn more than inflation eats away, one will actually be poorer in future with the same amount of money. With bank FD rates at 8.5-9 per cent and inflation around 6-7 per cent, investing in FDs will fetch very little inflation-adjusted return. So, one runs the risk of taking too little risk. Therefore, the returns need to be higher and will come only from riskier instruments. So-called safe instruments also carry reinvestment risk, that is, the maturity amount

cannot be invested to pay as much as the matured paper. Today, for instance, you will not be able to redeploy the maturity amount of your 12 per cent, 5-year fixed deposit in any paper that earns you similar returns. Says Dedhia: Fixed income is an essential part of a portfolio, but needs to be balanced with the right proportion of equity and other asset classes as well. Manish Jain, founder, Knowledge Partners, a Gurgaon-based financial planner, says: Women forget that fixed income also includes asset classes like debt mutual funds MFs). So, to maximise your returns, you need to invest across asset classes. That is what Bengaluru-based Saji Sebastian, 50, has done. She runs an art gallery while her husband is a researcher. She invests in stocks and real estate along with FDs. Says Sebastian: We try to split the investments and move them around whenever possible. Bengaluru-based schoolteacher Janaki Basker, 44, has two school-going kids and somewhat similar views about investing. So, along with her FDs, National Savings Certificate and recurring deposits, she owns MF units. I save through RDs and invest the maturity proceeds in MFs, she says. This helps her earn returns while saving and create a lump sum to invest in paper that gives better returns. Fixed income investments also carry default risk, that is, the risk of not getting your principal or interest back. Such risks are low for term deposits in banks (up to 1 lakh in each scheduled commercial bank is guaranteed by the Deposit Insurance And Credit Guarantee Corporation) and post offices, but not companies. If you invest in the last, check its performance, finances and credit rating.

Using FI Instruments Smartly Notwithstanding their low returns fixed income instruments are not to be shunned completely. Short term. After cash or savings account deposits (4-7 per cent a year), FDs (8.5-9 per cent a year and an additional 0.5-1 per cent for senior citizens) and liquid funds (4-5 per cent) are one of the most liquid investments. That makes them ideal for contingency funds, which would typically be 3-6 months of your monthly expenses. If you are a single woman, you must keep this fund. Financial planner Gaurav Mashruwala says: Liquid assets should form at least 15 per cent of your net worth. FDs are the tools for de-risking market or other risky investments as the nominal returns are certain. Recurring deposits in banks and post offices are a good slot for saving money for lump-sum expenses. Ultra short-term and short-term fundslowrisk since they invest in short-term bondsare also ideal. Medium term. These are typically goals that are at least 1-2 years away. Childbirth could be one of them. To cover hospital and other post-natal costs you could consider investing in the Post Office Monthly Income Scheme (P.O. MIS), RD or gilt funds. K.P. Jeewan, head-fixed income, Karvy Stock Broking, says: Corporate bonds and FMPs

also offer attractive options. During a career break, fixed income investments can help keep things smooth. Vivek Karwa, chairman, Vridhi Financial Services, suggests that you should keep three months expenses as cash in a liquid fund; half of the rest in an FD and the other half in an MIP. This would ensure that you get returns and your capital is safe. Long-term. Start saving 4-5 years before a big event like your marriage. You could also consider bank and corporate FDs, National Savings Certificate and tax-free bonds. Adds Jeewan: For longer-term investments, tax-free bonds are available at 8.10-8.35 per cent yields per annum. Renu Pothen, research manager, Fundsupermart.com India, says: Public Provident Fund is ideal for long-term goals. However, considering that you can invest only a limited amount in it each year, it is best to use it to build up a retirement corpus. Women should start as early as possible and stash away as much fund as they can. They can also consider increasing their contribution to the Employees Provident Fund beyond the mandatory 12 per cent of basic salary, and even invest in the New Pension System (NPS). On retirement go for immediate annuity scheme and choose annuity options where the survivor continues to get the pension. After retirement it is advisable to invest in secure products that give steady returns, typically fixed income instruments. The options are Senior Citizens Saving Scheme, FDs and P.O. MIS. One can also consider creating a series of fixed deposits maturing at regular intervals and rolling over the principal, a process called laddering. Credit: Outlook Money