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Fixed Deposits
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With investment avenues increasing by the day it is quite easy to forget that until the reforms era kicked off in 1991, Indians had very limited means of investing their savings. While it is true that we have not yet seen any development on the lines of the more developed economies there are a number of instruments today that were unheard of amidst the lay investors just a short decade ago. On the one hand investors are still struggling to come to terms with the complex nature of some securities and on the other intermediaries are trying to raise the investors' awareness. Stock favorites such as fixed deposits (FDs) are meanwhile enjoying a renewed burst of popularity.

fixed deposits

The slump in the capital markets and the large amounts of losses by investors in IPOs are but a couple of factors for this hunt for security by investors, even at the cost of lower returns. The central bank, RBI, and the market regulator, SEBI, have been attempting to rein in unscrupulous operators from cashing in on this rush for FDs. In fact, between 1994 and 1996 a few states like Tamil Nadu saw a literal explosion of FD offers with promises of impossible returns like 36 per cent to even 50 per cent per annum in some cases. A number of gullible investors saw their savings go up in smoke at the hands of such corporate entities. It is only recently that credit rating has been made mandatory for FD raising exercises, as were prudential norms.

However, the bitter lesson resulted in investors ignoring almost all other factors barring security while investing their savings. Thus, the past two years have seen a huge growth in bank deposits and in the FD levels of the better segment of India Inc. In this segment, we will regularly post details on the three main categories of FDs, i.e., with banks, manufacturing companies and non-banking finance companies or NBFCs. Investors can find information on various changes that occur in this sector and details on how government policies could affect this crucial area. We will also keep investors abreast of interest rates offered and the performance of individual entities in each of the three above-mentioned segments.

FIXED INSTRUMENTS In a world where the returns on your investment are directly proportional to the inherent risks, it is but natural that the investor who opts for fixed income instruments is well into his chosen career. Basic family needs such as an own house and reasonable insurance cover would have been provided for, but the proximity to retirement would prompt the need to lower investment risks. Also returns from investments form the principal source of income and preservation of capital is paramount.

As is the basic rule in choosing any investment option, here too it is essential that the investor decides in advance the proportion of investing in stocks and bonds. Periodic evaluation is equally important and while necessary changes have to be made, investments must never be switched for negligible changes in interest rates. For example if you are receiving say 12.5 per cent per annum through Bond A, think very hard before you decide to switch over to Bond B which promises 12.75 per cent or even 13 per cent. The decision to effect a change between fixed income instruments should not be made lightly as the security of the principal is sacrosanct. Thus judicious selection of instruments is critical.

Luckily in India there a number of avenues for such investors, with the most popular forms being:

Fixed deposits with banks and post offices.

Fixed deposits with companies.

Public sector bonds.

Income-oriented units and growth oriented units.

Non-convertible debentures of private sector.

Convertible debentures*

National Savings Certificates.

Provident Fund contributions.

Indira Vikas Patras.

Provident funds and public provident funds are also excellent areas of investment and offer both initial and a continuing tax advantage. There are added benefits such as the existence of a facility for partial withdrawals, attractive rates of returns and immunity from attachment of a court decree . If you are on the hunt for a tax-sheltered current income then give preference to income-oriented units and public sector bonds as rates of return are more attractive than other fixed income avenues with similar tax benefits. Convertible debentures of reputed, profit making companies are also worth picking up. Such securities are traded lower than the company's underlying equity. The company pays interest until conversion after which the investor gets dividend income. If your taxable income is less than Rs.50,000 and you have exhausted the limits for various tax-sheltered investments, non-convertible debentures, Indra Vikas Patras and corporate fixed deposit schemes would then be your best bet.

Proposition: In the last two or three years the hotel industry has been moving down. Most of the stocks have taken a beating. Foreign players have also started moving into the market. The general economic depression coupled with the S-E Asian crisis and the nuclear blasts have taken their toll on the industry. Recent trends indicate a shift in fortunes for the industry as a whole and especially for a few players.

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