With lower returns on small saving instruments, what are your options?

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1 Ventura Research Desk: The article for this month, With lower returns on small saving instruments, what are your options? throws light on the impact of interest rate cuts on various small saving schemes and the parameters one should consider before making an investment decision with respect to these instruments. Turn on to Page 3 which reveals the Power of regular investments. The top performing equity and debt mutual fund schemes are highlighted on Page 6 & 7. Happy Investing!! Juzer Gabajiwala Markets: Issue March, 2016 The Sensex and Nifty rose by 10.17% and 10.75%, respectively, in the month of March The market was primarily buoyed by hopes that some key Bills, such as the Real Estate Bill and the Bankruptcy Bill, would be passed in the ongoing Budget session; the former was passed later in the week. Fund inflows from overseas investors, following the dovish stances by global central banks, mainly fuelled the rise in the domestic market. Finance Minister, Arun Jaitley, rolled back a Budget proposal to tax withdrawals from the Employees' Provident Fund; the proposed annual limit of Rs 1.5 lakh for tax-free contributions by employers to EPF was also scrapped. The Index of Industrial Production fell for the third consecutive month, contracting 1.5% in January after declining 1.2% in December (revised). Consumer price based inflation in India fell to a 4 month low of 5.18% in Feb 2016 from 5.69% in Jan 2016 due to lower food inflation. Consumer food prices rose by 5.3% in February, as opposed to an increase of 6.85% in January. The Government s move to cut interest rates on small savings schemes by basis points (bps) reinforced hopes of a rate cut announcement from the RBI at its policy review on April 5 and lent a boost to the market. The yield on the 10-year government bond fell in March to 7.47% from a closing of 7.63% in the previous month, triggering a major rally in prices. According to data released by SEBI, FIIs were net buyers in the equity markets, with total purchases of Rs. 21,143 crore. On the other hand, domestic mutual funds were net sellers in the equity markets, with total sales of Rs. 8,058 crore during the month of March With lower returns on small saving instruments, what are your options? March, 2016 Smart investing starts here 1

2 *Returns as on 31-March-2016 Global Indices Returns: Most global markets were bullish during the month of March 2016, with the Shanghai Composite gaining the most (the index gain 11.75%). Amongst the Indian benchmark indices, the S&P BSE Sensex and Nifty 50 rose by 10.17% and 10.75%, respectively, in the month of March Top Performers *Returns as on 31-March-2016 Top 5/Bottom 5 Equity Schemes Under Performers Annualised Annualised Scheme Name Ret.* % (1Y) Scheme Name Ret.* % (1Y) ICICI Pru Global Stable Equity Fund 9.73 Kotak PSU Bank ETF SBI Small & Midcap Fund 8.63 GS PSU Bank BeES MOSt Shares NASDAQ-100 ETF 8.23 GS Infra BeES Sundaram-Select Thematic 7.24 LIC Nomura MF Banking & Funds-Enter Opp Financial Services Fund DSPBR Technology.com 6.17 Baroda Pioneer PSU Equity Fund Fund-Reg(G) Top Performers Debt Schemes Under Performers Annualised Annualised Scheme Name Ret.* % (1Y) Scheme Name Ret.* % (1Y) ICICI Pru Gilt-Treasury-PF JPMorgan India ST Income DHFL Pramerica Inflation Indexed JPMorgan India Treasury Fund Bond Fund DHFL Pramerica Credit Opp Fund JM Income 2.06 Baroda Pioneer Credit Opp Fund-A 9.77 IDBI Gilt Fund 3.34 Indiabulls ST Fund 9.55 IDBI Dynamic Bond Smart investing starts here March, 2016

3 Source: Wealth Creation through Mutual Funds, ICICI Prudential Mutual Fund. March, 2016 Smart investing starts here 3

4 With lower returns on small saving instruments, what are your options? Before investors could completely recover from the government of India s Budget 2016 proposal with respect to EPFs, another adverse policy change concerning small saving schemes has stepped into the spotlight. One of the most popular small-saving schemes, PPF (public provident fund), will now fetch an interest of 8.1% as against 8.7% earlier. Interest rates on a range of small saving schemes, including Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC) and Senior Citizen Savings Scheme (SCSS), have been cut by 40 to 130 basis points (see table below). These rates will be effective April 1, 2016 and will be subject to a quarterly revision based on a benchmark rate (10-year G-Sec yield). Snapshot of small saving schemes with the newly applicable interest rates (for April 1, 2016 to June 30, 2016) So, what does it means for an investor of popular small saving schemes like PPF and SCSS? Does it still make sense to continue to invest in them? Public Provident Fund (PPF): The popular Public Provident Fund (PPF) will yield 8.1% from April 1, 2016 compared with 8.7% at present. Despite the cut in rates, PPF still is a good bet as it has Exempt-Exempt-Exempt (EEE) tax status i.e. the principle invested, interest and maturity proceeds are all tax-exempt. Deposits into a PPF account qualify for tax deduction under Section 80C of the I-T Act. 4 Smart investing starts here March, 2016

5 However, as the government is going to change PPF rates every quarter, based on the historical 10-year G-Sec yield, PPF rates can go further down as government bond yields are on a declining trend. Accordingly, what options or alternatives should you look at? Here are a couple: Debt mutual funds offer scope for capital gains when rates fall. This is because bond prices are inversely proportionate to interest rates. One can expect returns in the range of 8-10% p.a. for a time horizon of 3 to 5 years. Tax-free bonds are suitable for people who are in highest tax bracket of 30% and want to generate a stable income. These bonds also offer scope for capital gains when rates fall; this is not the case with PPF. Senior Citizens Savings Scheme: The impact of falling interest rates is felt most by retired people and senior citizens, who are dependent solely on fixed-income instruments. The interest rate on SCSS is down by 0.7 percentage points from 9.3% to 8.6%. If you calculate the impact of lower interest rates in terms of loss of earnings to the depositor, it is huge. For example, a person who has invested the maximum allowed amount of Rs 15 lakh in SCSS was earlier earning Rs 1,39,500 per year and will now earn Rs 1,29,000 per year. This translates into a drop of Rs. 10,500 (7.5%). So what options should senior citizen investors look at? Tax free bonds are a good option for individuals in the 30% tax bracket. As interest income from SCSS is taxable, the post tax returns on SCSS will be 5.94% for an individual in the 30% tax bracket whereas interest rates on tax free bonds are in the range of 7.00 to 7.25% for a time period of years. One can also look at Debt mutual funds as an option to SCSS. However, there will be no regular cash flows or income from this investment option. For an individual in the 10% tax bracket or lower, corporate fixed deposits (AAA rated) is a good alternative. The interest rate on Shriram Transport Finance Fixed Deposit is 9.25% p.a. for a time period of 3 to 5 years with regular income payouts. Other Small Saving Schemes: The interest rates on some other small saving schemes like Post Office deposits, Kisan Vikas Patra, etc. have been cut by 40 to 130 basis points. They are not very tax efficient instruments as interest is taxable and no deduction is available under sec 80C. Hence, investors who are investing in these schemes should look for a better options like debt mutual funds and tax free bonds as explained above. Conclusion: Before making investment decision which involve fixed income instruments, consider the following parameters: 1. Do apple to apple comparisons by looking at post tax returns, i.e. take into consideration your income tax bracket. 2. Your need for regular income or cash flows. 3. Tax deduction under Sec 80C of I.T Act. 4. Liquidity, i.e. investment tenure or lock in period before which the principal amount cannot be withdrawn. March, 2016 Smart investing starts here 5

6 Performing Mutual Fund Plans Debt and Hybrid Funds Corpus NAV (Rs.) CAGR (%)* (Rs. Crs)# Gr Div 1 yr 3 yr 5 yr Income Funds ICICI Pru Long Term Plan Birla SL Medium Term Fund 5, Reliance Reg Savings Fund-Debt Plan 5, Gilt Funds SBI Magnum Gilt-LTP 2, IDFC G Sec-PF UTI Gilt Adv-LTP Hybrid - Monthly Income Plans(MIPs) Birla SL MIP II-Wealth SBI Magnum MIP-Floater Plan UTI MIS Adv Plan Crisil Composite Bond Fund Index 2, Crisil MIP Blended Index 3, Debt and Hybrid Funds Corpus NAV (Rs.) Annualised(%) * Ultra Short Term Plan (Rs. Crs)# Gr Div 3 mths 6 mths 1 yr Birla SL Savings Fund 12, UTI Treasury Advantage Fund 10,506 2, Liquid Funds Kotak Floater-ST 7,371 2, Birla SL Cash Plus 20, SBI Magnum InstaCash-Cash 3,912 3, Crisil Liquid Fund Index 2, *Returns are compounded annualized as on 31st March 2016 # Monthly Corpus as on 29th February Smart investing starts here March, 2016

7 Performing Mutual Fund Plans Equity and Hybrid Funds Corpus NAV (Rs.) CAGR (%)* (Rs. Crs)# Gr Div 1 yr 3 yrs 5 yrs Equity - Large Cap Birla SL Frontline Equity Fund 9, SBI Magnum Equity Fund 1, ICICI Pru Focused BlueChip Eq Fund 8, Equity - Multi Cap ICICI Pru Value Discovery Fund 9, Franklin India Prima Plus Fund 6, MOSt Focused Multicap 35 Fund 2, Equity - Mid & Small Cap DSPBR Micro-Cap Fund 2, UTI Mid Cap Fund 2, Mirae Asset Emerging BlueChip 1, Equity - Sectoral SBI Pharma Fund Franklin Build India Fund Tax Saving Scheme(ELSS) Axis LT Equity Fund 6, Birla SL Tax Relief '96 1, MOSt Focused Long Term Fund Balanced Fund HDFC Balanced Fund 4, Tata Balanced Fund 5, SBI Magnum Balanced Fund 3, Nifty 50 Index 7, S&P BSE Sensex 25, *Returns are compounded annualized as on 31st March 2016 # Monthly Corpus as on 29th February 2016 March, 2016 Smart investing starts here 7

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