FDs safest option as bank collapses are rare in India !!!!! - Partha Sinha | TNN

Low-risk investment options work on the idea that over the next few years, investments in most of the products that have historically given predictable returns will not deviate majorly from such a track record. For example, if one invested in a bank fixed deposit with a yearly return of 10%, then the investor will get the same amount at the end of the month. Here the risk lies in the bank collapsing and the investor not getting the interest and the full principal back. But for all practical purposes, such bank collapses are very rare in India. Seen from the other hand, there is no chance of the investor getting a return higher than the 10% rate agreed between the bank and the investor at the start of the fixed deposit.
On the other hand, equities are riskier investments. While blue chip companies are less riskier than smaller companies, even higher risk is associated with the so called ‘penny stocks’—the stocks which are trading at below Re 1. If one invests in penny stocks, there is no guarantee of any return, and there is a very high risk of losing money. On the other hand, in case there is some positive development in the company whose stock is trading below Re 1, the stock could double in no time.
This brings us to what is called the riskreturn trade-off. Usually, low-risk investments give lower return but higher chance of stability in return. On the other hand, high risk investments have higher returns, and thus lower stability in return. In this issue, we plan to give you some pointers to the investments that carry lower risks. So naturally the returns would also not be high.
We have already given you the example of bank FDs, which carry lower risks
but lower, fixed returns. The other options are small savings
schemes like National Savings Certificate, post office monthly income schemes, public provident funds, etc. Bonds and nonconvertible debentures (NCDs) of government-run companies and blue chip companies are also relatively safer investments. Often, you will find that some companies are paying a higher rate of return on FDs floated by them than other companies. Here more a company pays in their FDs, higher the risk the investor has. One way to find out which company has a lower risk than the other is to look at the ratings assigned to the company by ratings agencies like Crisil, ICRA, CARE, etc. Better the ratings (AAA is the highest, D is the lowest) of a company, lower would be the risks in its FDs, but at the same time lower would be the interest on such FDs.
Among the low risk investment options that investors can consider are the mutual funds schemes, especially the ones that have higher exposure to bonds, money market instruments etc and lower exposure to stocks. Among the several advantages of investing in mutual funds is that investors get professional fund management expertise but at a much lower cost than if they invest directly.
Among the lower risk fund options are fixed maturity plans, popularly FMPs. Compared to FDs,in which investors know how much they will earn at the end of the term, FMPs indicate a return that you can earn at the end of the plan, but do not assure it. So the actual return c o u l d deviate from the indicative return, but mostly such differences are minimal. However, in FMPs, the post-tax return is usually higher than FDs of comparable maturity. This is because tax treatments are favourable to FMPs over FDs. So wh i l e F D s are suitable for those who are satisfied with assured returns, if you are willing to take a slightly higher risk, you can consider FMPs for a slightly higher return.
There are some types of mutual fund schemes available in the market which offer even lower risks than FMPs. These are liquid funds, ultra short-term debt funds, capital protection oriented funds and short term income funds.
There is another category of funds called Gilt funds, which invest mainly in government securities. Since these are securities backed by government guarantees, a few years ago investors were of the idea that there were no risks in these funds. This is not true. While the principal and interest in these securities are fully guaranteed by the government,you should remember that the market price of these securities vary and so the NAVs, and hence the returns, on these schemes can also vary.So,these funds are not risk-free investment products. Monthly income plans (MIPs) are also considered lowrisk options, but before you invest in these schemes remember to check how much equity exposure the fund can take. Here again, the thumb rule
is higher the equity exposure, higher the risks associated with these funds. The same rule applies to balanced funds. So, if you are looking for low-risk investments, please have a look at the equity exposure and also consult with your financial planner before you take the plunge.