Saturday February 15, 11:30 AM
What if the Relief Bond… |
|
By Personalfn.com
If there is one thing that investors are hoping will not happen in the budget, it is the dilution of tax benefits under section 88. In fact, make that two, the other being the reduction in interest rates or discontinuation of the RBI Relief Bonds in its present form.
Despite the reduction in interest rates and the imposition of a cap of Rs 200,000 per individual per year, the RBI Relief Bond continues to be one of the most popular investment instruments in the country today. It is very attractive for a variety of reasons:
The Relief Bond comes closest to being risk free among all investment instruments.
Attractive interest rate of 8% pa for 5 years (as compared to a 10 year G-Sec which offers only about 6.5%).
The interest income is totally tax free.
Existence of a secondary market, which lends liquidity to the product.
Most banks/institutions offer loans against Relief Bonds, given its sovereign rating.
Indeed, the RBI Relief Bond is a very attractive investment opportunity for individuals looking at investing in very low risk bearing instruments.
In an earlier article, we had discussed the distortion in the returns offered by various Government Savings Schemes The Unsustainability of Government Savings Schemes. This led us to conclude that the distortion in the interest rate structure will make these schemes unsustainable (they already seem to be).
And now with the budget approaching, the government could finally set the ball rolling. What could happen to the RBI Relief Bond -
The interest rate offered by the RBI Relief Bond could be reduced, to possibly 6% (in line with the yield curve).
The investment limit could be reduced and/or loop holes plugged to ensure that the amount of investment does not exceed Rs 200,000 per individual.
Investment in the Relief Bond could be restricted to only retirees.
The scheme could be closed (unlikely, as the elections are fast approaching).
No change might be proposed
Now whether any of these scenarios turn out is very difficult to predict. Rather impossible. However, as far as rational investors are concerned, one of these five (rather the first four) scenarios is likely to play out sometime in the future. Other government savings schemes too, especially the schemes offered by the post office are likely to undergo significant change in the future.
For the rational investor, the time to plan for this eventuality is now! Planning for investments in a post `assured return' environment will be a challenging task especially for investors whose portfolios consist predominantly of schemes offered by the government of India.
What should you do now?
Given your overall asset allocation plan, if you were planning to invest in Relief Bonds in the near future, it would be advisable to bring forward the investment date (subject to liquidity, ofcourse).
What steps should you take to ensure that in a post `assured return' environment your investments can do just as well?
Broadly speaking, there are two ways you can deal with this:
Develop an understanding of the other investment opportunities available in the market. Of these, one of the most important would be mutual funds, which are designed to meet the wide variety of needs of an individual. You can begin by reading our publication on mutual funds (available free):
- The Mutual Fund Handbook
If you wish to avoid the task of developing an expertise in investment products, you can opt for the services of a financial planner - someone who can advise you in planning your investments. How should you go about doing this? Read our article:
-
5 Steps to become a smart investor
If you are in Mumbai, you can benefit from Personalfn's personalized investment and insurance services. To meet our representative, please click here.
|
Personalfn clients get access to Daily Alerts, Portfolio Tracker, Views/Advice... all for FREE!
|
|
