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RETIRE FROM WORK, NOT YOUR RETURNS.

Posted By: Admin

Arun Thiagarajan, 65 ( name Changed) had returned after many years abroad for a well deserved retired life. Five years ago,  he had deposited a significant portion of his post retirement corpus in bank Fixed Deposits. The bank managers had come home and offered some of the best FD rates that were then available. So in spite of the fact that he was on a high tax slab, the overall high rate of FD interest seemed to provide a mild comfort that even after the high tax, he would be left with a reasonable return to manage his household expenses. 

 

However all that changed when he went to renew his FD a couple of weeks ago. The bank manager expressed regret that the new interest rates had moved down drastically and they were now less than 5 % for 1 year FD. He returned home without renewing the FD as he felt that on 5% the tax would take away almost 1.50% and he would be left with almost nothing.

 

If  you are like Arun Thiagarajan, who invests in Risk-free Instruments like FDs but not satisfied with their returns.  

 

Here is an option that you can explore, Conservative Hybrid Funds.

 

These funds are invested 75%-80% on Debt Instruments like Corporate Bonds, Govt Securities, Debentures and Certificates of Deposits. The balance is invested into Equity stocks to generate a higher return. As the majority of its assets are invested in debt securities, it is considered relatively safer than pure equity funds. 

 

Conservative Hybrid Funds come under debt taxation. If the fund is redeemed within 36 months, it will be taxed under slab rate and if it is redeemed after 36 months, it will be taxed at 20% with indexation benefit. So the tax efficiency for a high tax assessee is to stay invested for a  Three year term and the post indexation return may be superior to what he hopes to see in the bank. Although the rate of return would not be guaranteed and as per market performance of both debt & Equity investments. 

 

Conservative Hybrid Funds are designed to be reasonably Capital Protective. From the below table we can understand that, Assuming debt return of 7%, if the Equity market falls 10% you would get a return of 3.6% and if the Equity Market gains 10% you get a return of 7.6%.

 

 

Equity Return

Debt Return

Debt

Equity

Return

80%

20%

-10%

7%

5.6%

-2.00%

3.60%

-5%

7%

5.6%

-1.00%

4.60%

0

7%

5.6%

0.00%

5.60%

5%

7%

5.6%

1.00%

6.60%

10%

7%

5.6%

2.00%

7.60%



So Conservative Hybrid Funds can be considered by persons who are looking for an alternative to traditional FDs as long as they are okay with a non guaranteed return and they are looking at this from a three and above perspective. 

 

By : Santhosh J

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