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What’s best for STP?


Ram, one of our subscribers, recently contacted us, saying he had received Rs 50 lakh from a property sale and wanted to invest in a hybrid fund to build a sizable retirement kitty.


But since Ram knows he should not put the entire money in a mutual fund in one go, he is wondering if stashing the money in an arbitrage fund and then setting up an STP to a hybrid fund over the next three years would be the better option.


That way, he’d be able to spread his Rs 50 lakh investment in a hybrid fund over three years, and at the same time, the money that would lie in the arbitrage fund would earn acceptable returns.


His proposed idea got the number-crunchers working in our dark, damp dungeon excited, now that they had a new project of finding out if there were better options than an arbitrage fund.


But before we lay out the numbers, let’s take a step back and understand what on earth an STP is and its benefits for the larger audience.


What is STP


Full name: Systematic transfer plan.


Role: It allows investors to transfer a specific amount from one fund to another at regular intervals.


Benefits: Markets are generally volatile over short periods. Therefore, putting all your money in a mutual fund in one shot is not ideal, as it can fall in value over the short term.

This is where an STP comes in.


It ensures your large sum of money – Rs 50 lakh in Ram’s case – is protected from market volatility, while earning acceptable returns that match or beat inflation at least.


Last but not least is the STP’s ability to provide the benefits of rupee-cost averaging. In layperson’s terms, spreading your investment helps avoid catching the market high. Instead, you invest more when the markets are depressed, and less when markets are expensive. (This is a strategy investors dream of, to be honest).


Now that we know what an STP is, let us tackle Ram’s question of whether he should put his Rs 50 lakh in an arbitrage fund and then start an STP to a hybrid fund.


Tackling Ram’s question

Arbitrage funds have competition in this space. Besides them, Ram can also think of stashing his Rs 50 lakh in the following options:

  • Fixed deposits (FDs)
  • Short-term debt funds
  • Bank savings account


Let’s tackle arbitrage funds first. Over the last 12 months to five years, these funds have generated 3.9-5.19 per cent on average, and their tax outgo is 15 per cent in the first year and 10 per cent after that.


Short-term debt funds. They have delivered 5.68-6.51 per cent returns on average in the last 12 months to five years, and the tax outgo depends on which tax bracket you fall under. For instance, if you earn over Rs 10 lakh per annum and are in the old tax regime, your gains from these funds will be taxed at 30 per cent.


Fixed deposits. FDs have delivered assured returns in the 6-7 per cent range in recent years, but you can be taxed up to 30 per cent on the interest earned. Worse, you’ll need to pay tax yearly, unlike short-term debt funds where you pay tax only when you withdraw your money.


Even worse is that FDs aren’t very STP-friendly. Here, you need to manually withdraw your money each month to get the STP going. Hence the reason it’s not recommended.


Savings account. The humble savings account in your bank offers assured interest of around 3 per cent. (There are a few small banks that provide 6 per cent interest as well).


But even in their case, you can be taxed up to 30 per cent on the interest earned, though interest up to Rs 10,000 is tax-exempted if you are below 60.


What should Ram or you do

There is no clear winner here. Different options have different strengths (and weaknesses).


From a tax perspective, arbitrage funds emerge victorious.


From a returns perspective, they are all closely bunched together. Perhaps, short-term debt funds eke out slightly higher post-tax returns than the other three options. Looking ahead, these funds will provide higher returns as yields of bonds have risen in the last few months. By that logic, returns of arbitrage funds will rise too, as some portion of their portfolio is invested in debt.


That said, returns should not be of paramount importance when you plan to start an STP. You should look at capital preservation instead.


In that case, savings account, FD and short-duration debt funds hold up well. But let’s rule out FDs because, as mentioned earlier, they are not well-configured for STPs.


Lastly, if you prefer convenience over an extra per cent or two returns, you can simply stash your money in a savings account and start an SIP to a hybrid fund.

Source- Valueresearchonline


How to get free govt insurance for your bank FDs up to Rs 65 lakh

When a bank fails, the only respite a depositor has is the insurance cover offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Though the insurance cover under DICGC was raised to Rs 5 lakh from Rs 1 lakh, effective from February 4, 2020, this amount can be inadequate for many depositors.


However, did you know that you can increase this insurance cover and enjoy a total cover of Rs 65 lakh or more without spreading your deposits across different banks? Read on to find out how you can get a cover of Rs 65 lakh or more in the same bank and same branch.


What are the types of deposits that enjoy DICGC insurance cover?
The insurance cover offered by DICGC works on deposits such as savings accounts, fixed deposits (FD), current accounts, recurring deposits (RD), etc. However, there are few deposits which are excluded such as the deposits of foreign governments, central/state governments, the state land development banks with a state co-operative bank, inter-bank deposits, any amount due on account of and deposit received outside India and any amount, which has been specifically exempted by the corporation with the previous approval of the Reserve Bank of India (RBI).


How does the deposit insurance work?
As per the DICGC guidelines, each depositor in a bank is insured up to a maximum of Rs 5 lakh for both principal and interest amounts held by her/him in the same right and same capacity as on the date of liquidation/cancellation of the bank’s license or the date on which the scheme of amalgamation/merger/reconstruction comes into force.


What this means is that all your accounts held in the same right and capacity whether savings or current account, FD or RD, will be clubbed and you will get only a total insurance cover of Rs 5 lakh. This amount includes both principal and the accumulated interest amount.


So, if your principal amount is Rs 5 lakh, then you will only get this amount back and not the accumulated interest on the deposits if the bank fails. However, if the principal and accumulated interest taken together is Rs 5 lakh or less, you will get the total amount back in claim if the bank fails.


Therefore, it is better to go by maturity amount of the deposits while calculating the insurance cover. Nevertheless, if you have a non-cumulative deposit, where you regularly earn interest, then you can keep the principal amount of around Rs 5 lakh as well.


Extra insurance cover with accounts held in different rights in capacities
If you hold deposits in different rights and capacities, each of your deposits will enjoy a cover of Rs 5 lakh separately in the same bank, as per DICGC guidelines.


“Depositors can open fixed deposits in the same bank, but in different rights and capacity. In simple words, if you open a fixed deposit in same bank as a joint holder with your spouse, brother or children, or you open a FD as a partner of a firm, guardian of a minor and so on, then all these FD will be considered as held in different capacity and different right, and each account will have the insurance cover up to Rs 5 lakh separately. So, ideally you should segregate your investment in FD, to enjoy higher deposit insurance coverage even in the same bank,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm.


Let us understand how multiple covers of Rs 5 lakh can work on different accounts with an example of a family of six. Mr A and his spouse Mrs B have a minor son X and minor daughter Y, Mr C and Mrs D are the father and the mother of Mr A.


If Mr A, besides his individual accounts also opens other deposit accounts in his capacity as a partner of a firm or guardian of a minor or director of a company or trustee of a trust or a joint account, say with his wife Mrs B, in one or more branches of the bank then such accounts are considered as held in different capacities and different rights. Accordingly, such deposit accounts will also enjoy the insurance cover up to Rs 5 lakh separately.


As can be seen from the example, if you have 13 such separate accounts of Rs 5 lakh each, then you can get an insurance cover on each of these accounts, and thereby enjoy insurance cover of Rs 65 lakh (5 x 13 = 65).


Govila adds: If you want to make an FD of Rs 10 lakh in a bank which is offering better interest rate than another bank, you may invest Rs 2.5 lakh in FD as an individual investor, Rs 2.5 lakh each as joint investor with your spouse and child where you are the first holder, another deposit of Rs 2.5 lakh as a joint investor with your spouse (here your spouse should be the first holder). By doing so, all your FDs will be treated as separate accounts and each one will be ensured for up to Rs 5 lakh each.


Where this won’t work: However, the separate insurance cover does not work if you have a proprietorship account along with an individual account. In this case, your proprietorship account will be clubbed with your individual account and you will get a total insurance cover of Rs 5 lakh.


Does the DICGC insurance cover of Rs 5 lakh apply for all banks?
All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC. At present all co-operative banks are covered by the DICGC. However, deposits in primary cooperative societies are not insured by the DICGC. Moreover, deposits in any NBFC or HFC or corporate entity do not enjoy this insurance cover.


What you should do
Preservation of capital remains the highest priority for a majority of FD investors. Banks have traditionally been the most trusted institutions when it comes to safekeeping of public money.


However, this has changed of late. In the recent past, we have witnessed many instances where the financial stress and failure of several banks in India (like YES Bank, PMC Bank) have shocked conservative investors who invest their savings in bank deposits or keep it tucked away in bank savings accounts.


It is said that you should not put all your eggs into one basket. The same can be said about your deposits as well — do not put all your money into one account or FD. The best way to ensure the safety of your bank deposits is to make sure that you make deposits in different rights and capacities while keeping the maturity amount up to Rs 5 lakh in accounts held in the same right and capacity.


Source: Economictimes

FD interest rates on the rise: What should be your investment strategy now?

Fixed deposit (FD) interest rates have significantly dropped during the last three years. Currently, the repo rate is at a historic low of 4%, which has not changed since May 2020. This trend has led investors to search for alternative ways to generate income.


Thankfully, there have been small hikes recently in the FD rates of some financial institutions, including the national banks. This hints at the bottoming out of rates and investors need to prepare their strategy to make the most out of this.


So, what are the different techniques you may use to invest for higher returns via bank FDs? Let’s look at some options.


Short or Medium Terms FDs


When the interest rate cycle turns back after bottoming out, it has been noted that short- and medium-term FD interest rates respond quicker to rate change than long-term FDs. Investing in FDs with short or medium-term maturity helps you switch to a higher FD rate. When the rates are expected to go up, you should avoid committing to long-term FDs because you may miss out on the benefit of the rising interest rate. The interest rate may not increase immediately, but it may gradually inch upward. So short-term FDs can keep your FD investments closer to the prevailing interest rate offered by banks, according to Bankbazaar.


Floating Rate FDs


A few banks are offering floating rate FDs to their customers. The interest rate on floating rate FDs may not look attractive compared to the current fixed rate FDs; however, if the rate increases, the floating rate FDs can easily be a winner. Floating rate FDs can be beneficial if you don’t want to get into the hassle of continuously switching old short-term FDs to higher rate FDs.


Diversify New FD Investments Into Bank and Company FDs


When interest rates go up, it’s not only banks that increase their FD rates, but the rates of company FDs are also increased. Diversifying your investment into banks and company FDs can be a good option for better average rates. By diversifying FD investment into banks and company FDs, you can ensure higher returns on your investment. Company FDs offer a higher interest rate, but you need to do your diligence before investing your money.


Use the FD laddering option


FD laddering is an excellent option to ensure a high return on FDs amid the chances of a rise in the interest rate. You can make your own FD laddering strategy by spreading your lumpsum fund into different FDs with multiple maturities.


For example, if you want to invest Rs 5 lakh, you can break it into 5 FDs with a maturity period of 1 year, 2 years, and so on up to 5 years. On maturity, you can use the amount if you have a requirement, or you can continue with the existing laddering by reinvesting the matured corpus into a new FD for 5 years. You may choose different banks, companies and the FD amount while creating an FD laddering strategy.


When the interest rate is expected to increase gradually, you can shift your corpus to an FD that offers a higher interest rate on each maturity. So, you can ensure a higher return on investment in the long term. If you create an FD laddering by investing money in different banks’ deposit schemes, it can also help you get the insurance benefit of up to Rs 5 lakh in each bank.


You must not wait for a rate hike to invest in FDs because it’s not definite when the rate will go up, and there is a chance that it may happen multiple times. So, after each hike, you will get enticed for another rate hike. Until you invest, you’ll lose the return on your corpus. Use these techniques to get the maximum benefit out of your FD investment.


Source: financialexpress

Why Should you Invest in Corporate FDs?

Money doesn’t grow on trees, but the right savings and investment plans can help it grow. The pandemic has triggered a great deal of uncertainty and risk aversion in the way we invest our hard-earned money. Many of us want to turn away from high-risk instruments or lower our exposure to them while increasing our low-risk investments. Debt instruments are considered safe and include bonds, debentures, certificates of deposits, debt funds, fixed deposits, etc.


Keeping your money in a bank is safe, but your savings account will give you a mere 3.5% return. One way to diversify your corpus is bank FDs and corporate FDs. Bank FDs offer a return of 5-5.5%, whereas corporate FDs earn higher returns while maintaining low-risk levels. A corporate FD is similar to a bank FD but gives you a better return with low-risk. Since most of the instruments are rated, corporate fixed deposits have a high degree of safety level. Corporates offer returns of 7.5%-8.5% for a 1 year to 5 year deposit and 8-9% on a cumulative basis.


How do you choose the right company to invest in?


You need to consider 3 parameters:


⦁ Ratings: These term deposits are usually rated for their credibility by a few rating agencies, namely ICRA, CARE, CRISIL, etc. Generally, companies with a AA to AAA credit rating indicate a moderate to high safety of interest payment. As you go lower in the rating chart, the degree of safety reduces.


⦁ Parentage: While assessing the quality of the corporate, we need to factor in the likely support from a higher-rated parent in the event of distress. The number of years in existence and corporate governance standards of the Group. A strong parent can lend comfort to the investor.


⦁ Interest rate: The best part about a company FD is the higher interest rate. The rates paid are comparatively much higher than what is paid for an average bank FD. It is important to check and make comparisons for interest rates before opting for one. Certain NBFCs and companies offer higher interest rates when compared to others for the same tenure. The reason for corporates (or more precisely, NBFCs) offering FD rates that are higher than those of banks is because NBFCs get returns from their lending business which are higher than those earned by banks, and are therefore able to pass these on to depositors. At the same time, NBFCs ensure that their lending operations are within specified parameters and that asset quality is maintained.


Some of the key risks, however, to keep in mind while investing must not be ignored. Make sure that the company has been paying regular interest to its shareholders. The balance sheet of the companies has shown a consistent track record of profits at least for 3 years. With the number of start-ups entering the market rising, make sure the company has been in existence for the last 5 years at least. Ensure they are offering realistic returns (2-3% more than a bank FD).


Do not fall prey to those companies which are offering very high returns, where the risk-reward is unrealistic. Make sure these companies are listed on the stock exchange, companies that are listed will be well regulated. Do not place all your eggs in 1 basket, diversify to limit your risk. Do not opt for very long tenures with lock-ins, invest for 1-2 years and take stock of the performance of timely payments annually. Don’t go by misleading ads, always calculate the CAGR and compare it with others.


Finally, is the timing right for your investment? Choosing to invest when interest rates are high means returns of your FD will be the highest, but also account for inflation. Systematically and periodically investing 10% of your income can prove to be a good strategy in the initial stages of your life and gradually increasing this ratio to 40% as you grow older can be a good strategy in the long run. Investing ultimately is laying out your money now, to get more in the future.


Source: Financialexpress

Earn Up to 7.25% on FD

Earn Up to 7.25% on FD

Deposit (or FD) is a low-risk financial instrument that is offered by banks, post offices, or Non-Banking Financial Companies (NBFCS). 

You can easily invest in a Fixed Deposit and grow your savings at a fixed rate of interest, which is higher than interest rates offered by savings accounts. 

The convenience of investing along with the safety of your deposit can help you plan your short-term and long-term goals easily.

At Bajaj Finance Limited, you get attractive FD interest rates of up to 7.25%, so you can save for your goals easily. 

Investing in a Bajaj Finance Fixed Deposit is easy, as you can invest from the comfort of your home through an end-to-end paperless online investment process.

In today’s times of increasing market volatilities, investing in a Bajaj Finance Fixed Deposit can help you get assured returns and steady growth of capital. 

So you can build your savings with no effect of market fluctuations.

DID You Know? Bajaj Finance is now offering interest rates of up to 7.00% on fixed deposit and 0.25% more for senior citizens. 

What’s more, online investors get 0.10% extra (not applicable for senior citizens) – Invest Online

Benefits of Bajaj Finance Fixed Deposit

Interest Rate                                                                     Ranging from 7% to 7.25%

Minimum Tenor                                                               1 Year

Maximum Tenor                                                              5 Years

Deposit Amount                                                              Minimum deposit of Rs. 25,000

Application Process                                                       Easy online paperless process



What to start early: Investment or Insurance?

Several reasons why you should start investing and also get insurance at a young age. But, at the time when we start our career, with a little income and too many expenses, the dilemma that we often face is should we invest or insure first?

Through this blog, I will try to help you get over this dilemma, i.e. whether to invest or insure first.

Before I get it into explaining whether to invest or insure first, it is important to understand why it is important to start investing and also buy insurance (health and life) early in life.

2 reasons why you should start investing early

Starting your investments early improves your spending habits

At the time when we start earning, our income is quite low. And if we want to save from that little amount of salary that we get, then we have to put restrictions on our spending by creating a budget. Over the years this simple practice becomes a habit, eventually improving our spending habits.

To adopt the simple habit of saving/investing, put away the part of the salary at the start of the month. And, then make a monthly budget with the rest of the money you have in hand. 

Say you earn Rs 30,000 monthly and out of that you want to save Rs 10,000 every month. So as soon as you get your salary, put Rs 10,000 away, and then create a monthly budget with the rest Rs 20,000.

You enjoy the benefit of compounding
For starting your investments early, you stay invested for longer, which automatically increases the benefit of compounding. Let’s understand this with 2 simple examples.

Say you want to save Rs 5 crore for your retirement. Now, with that goal in mind, you start investing in an equity mutual fund from the age of 22. For this, you will have to keep investing Rs 5,500 for the next 38 years, and your total investments would be Rs 25 lakh.

In the second case, the goal remains the same but you start investing in the goal much later, let’s say at 45. For this, you would need to invest Rs 1 lakh every month for the next 15 years and your total investment amount would be Rs 1.8 crore.

This is how compounding works in favor of money over the years.

After looking at the reasons why one should start investing early, let’s understand why it is equally important to get insurance at a young age.

Here as we speak about insurance, we mean both health and life insurance.
Speaking about health insurance, no matter what your age is you should always have health insurance. 

Sickness or some health emergencies can come at any time and if you do not have health insurance, medical expenses can burn a huge hole in your pocket. So you should never delay the process of getting health insurance.

However, we often delay the process of buying a term life reason for very simple but foolish reasons. The common notions are since we are young and healthy or at this stage, as the responsibilities are less, we do not need term life insurance. However, contrary to the popular belief, buying term insurance early on is always favorable.

2 reasons why you should buy term life insurance early

The premium amount is low
The biggest advantage of buying term life insurance early on is the premium amount that you pay is much less as compared to what you would pay if you buy it at a later stage in life.

For example, say you want to buy a policy of Rs 1 crore that would give you coverage till 75 years. If you buy it at 25, the premium amount would be Rs 8,000 annually. At 30, it would be Rs 10,000. And at 45, the premium for the same policy would be Rs 30,000.

Your family gets covered early on
The sooner you buy the term insurance, the sooner your family gets covered. Even if you are not married, your parents might be dependent on you or you might have a loan (vehicle loan, student loan), 

In case you die early then your family will have to bear that burden. Having term insurance ensures your family will not have to go through financial hardship in case something happens to you

So finally, whether to invest or insure first?
So, this is typically a chicken and egg situation – who came first.
To put more aptly, here it would be which one to do first, buy insurance, or start investing? Now, the best thing to do is to do both things simultaneously.

For example, let’s suppose Rajeev is a 25-years-old, and given his monthly income of Rs 40,000, he can take out Rs 10,000 each month, i.e. Rs 1.2 lakh annually, for savings/investments/insurance. So what should he do?

Here is how you can allot the money towards insurance and investments

Health insurance: It is a good practice to have at least 6 times your monthly salary as your health insurance coverage. By that logic, since Rajeev’s monthly income is Rs 40,000, his health coverage should be between Rs 2.4 to Rs 2.5 lakh. At the age of 25, the yearly premium amount for Rs 2.5 lakh health insurance would be about Rs 5,000.

Term life insurance: Since Rajeev doesn’t have a lot of liabilities, a term cover of Rs. 1 crore would be enough. Say the term life insurance cover that you need at this stage is Rs 50 lakh. The premium for a Rs 1 crore term policy would be around Rs 8,000 annually.

Investments: The rest of the Rs 1.1 lakh you can invest in Mutual Funds. Since Rajeev is young, he can take risks, and therefore you should invest in equity mutual funds. He can consider large-cap mutual funds or multi-cap funds and start a monthly SIP in these funds.

Now, as and when the income increases, he should also increase your investment amount. Rajeev should also review his health and term cover at regular intervals to ensure the cover is sufficient.

Corporate Fixed Deposit

CFD Better Then Bank FD (Fixed Deposit)

FDs are normally a fixed deposit and a saving instrument, which gives a higher rate of interest than a regular savings account. 

It is a term deposit in which we invest in a lump sum amount and we get interest on it till maturity. 

FD’s are normally offered by the bank. But NBFC’s (Non-Banking Financial Companies) also offer the FD’s and it is known as Corporate Fixed Deposits. They are the same as bank FDs.

Corporate Fixed Deposit (CFD) is a term deposit that is held over a fixed period at fixed rates of interest. The maturities of various corporate fixed deposits can range from a few months to a few years.

Their functioning is somewhat similar to Bank FDs but they are offered a higher rate of interest. The risk involved with corporate FDs is significantly higher. If the company hits a recession or goes bankrupt then the returns cannot be provided at the maturity of corporate FDs.

The medium of the deposit is a certificate of deposit. The corporate FDs are not insured, that means, in case of default you will not get Rs 5 lakh as in the case of bank fixed deposits. It gives high returns as compared to Bank FD’s as they involve high risks.

Key benefits of Corporate FD’s :

Higher returns – Enjoy greater returns from Corporate FDs as compared to the bank FDs.

Flexibility – Choose Corporate FDs as per your preference from a variety of tenures such as monthly, quarterly, half-yearly, or yearly.

Liquidity – Enjoy better liquidity with Corporate FDs with a lower lock-in period than Bank FDs

Premature Withdrawals – Opting for premature withdrawal in FD means depositors can withdraw their amount and close the account before the term ends.

Safety – Company deposits are carefully inspected by credit rating agencies. These agencies check whether such FDs are safe and stable.

Tips for choosing a Corporate FD:

Credit Rating: Opt for higher-rated corporate FDs based on its credit rating which indicates the underlying risk of the company.

Company Background: Assess a company’s business viability by referring to its Financial Statements, Management Discussion, and Analysis (MD & A).

Repayment History: Companies’ repayment history helps to determine the company’s credit score, credibility, and stability.

Risk profile: Make sure that the company you pick is financially healthy and helps you rule out any default risk during the fixed deposit period.

Terms of FD: A cumulative scheme could be better than a regular income option as the interest earned gets invested in other avenues. At the end of the day, you’ll have a lump-sum amount in your hands. But not if you’re looking for a regular income from the FD.

Here are the top NBFC’s recommended by our expert.
1. HDFC Ltd (Housing Development Finance Corporation Ltd)
2. PNB Housing (Punjab National Bank Housing Finance)
3. Mahindra Finance (Mahindra & Mahindra Financial Services Ltd)