Tag: bank fixed deposit

How a youngster can build a balanced portfolio for life needs

Personal Finance

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Arun is 27 years old. He started working about four years back.

His parents do well financially and are not dependent on him. Both are in government sector and have pensionable jobs.

He wants to contribute ₹5 lakh towards his sister’s wedding that is scheduled after six months. Additionally, he wants to set aside ₹5 lakh for own wedding that he expects to happen in the next 3-5 years. Any excess can go towards retirement.

Arun has bought life cover for ₹1 crore and a private health insurance plan of ₹10 lakh. His parents and sister are covered under separate plans.

His only savings are ₹8 lakh in EPF and ₹15 lakhs in bank fixed deposits. Of this, he has set aside ₹10 lakh towards emergency corpus. This can cover 12-15 months of his expenses.

Further, every month, ₹20,000 goes towards EPF. He can invest another ₹80,000 per month.

He knows he can invest aggressively given his age and income profile, but he is not clear about whether he will be comfortable with portfolio ups and downs.

Recommendations

Arun has got his insurance covered. He must, however, revisit the insurance portfolio once he gets married or assumes a financial liability such as loan. The emergency fund of ₹10 lakhs is robust too.

For his sister’s wedding, he can set aside ₹5 lakh from his fixed deposits. The wedding is too soon to take any investment risk.

For his wedding, he has just given a ballpark. Additionally, the timing is also not very certain. Assuming we have four years to save for his wedding, he will need to invest about ₹11,500 per month to accumulate his wedding fund. He can put this money in a bank recurring deposit or a debt mutual fund.

The rest of the amount (around ₹68,000) can go towards his long-term goals, including retirement. He is already contributing to EPF. Given his age, he must consider allocating money to growth assets such as equities.

At this life stage, it is important not to get bogged down with retirement planning calculations. Many life milestones are yet to come, and the best earning years are ahead of him. His time and energy are better spent on enhancing career and income prospects. From an investment perspective, he just needs to continue investing regularly.

He is new to risky investments and is unsure about his risk appetite. There are a few things that you can learn only through experience. Risk appetite is one such thing. While his age ensures this risk-taking ability is high,behavioural DNA defines his risk appetite otherwise. He wouldn’t know his true risk appetite unless he experiences market ups and downs first-hand.

Two approaches

There are two approaches he can take.

1. Not take any risk. Stick with EPF, PPF and bank fixed deposits. Given his age, such a conservative portfolio is not warranted. Moreover, he would never discover his risk appetite.

2. Take risk but reduce portfolio volatility. This is a better approach.

He can work with an asset allocation approach. From the incremental investments, he can route 50 per cent of the money towards equity and the remaining towards fixed income. He can start with a small allocation and inch up to 50-60 per cent in the equity investments.

After saving for his marriage expenses he can invest another ₹88,500 for long-term savings, out of which ₹20,000 already goes towards EPF. Assuming he wants to go with 50:50 allocation, ₹44,000 from his monthly savings can be in equity products.

For equity investments, he can

1. Start with a large-cap or a multi-cap fund. A simple large-cap index fund will do. Or

2. Pick a dynamic asset allocation fund or a balanced advantage fund. Or

3. Pick a single asset allocation fund that invests in domestic stocks, international stocks, and gold. Or

4. Pick a large-cap index fund, an international stock fund and a gold ETF/mutual funds. This replicates the third approach but is cumbersome to invest for a new investor.

The first approach is simple since picking up an index fund is an easy decision. For the second and third approach, he will have to pick up an actively managed fund and choosing one can be tricky. However, the second and third approaches are likely to be less volatile and easy to stick with. This is just the initial choice. As he gets more comfortable with equity investments, he can add different types of funds in the portfolio.

In the fixed income portfolio, he is already contributing to EPF. He can also invest in PPF. Beyond these two products, he can consider bank fixed deposits or a good credit quality and low duration debt mutual fund. For his income profile, debt MFs will be more tax efficient than bank FDs. However, debt funds carry higher risk than bank FDs.

The writer is a SEBI-registered investment advisor and founder of www.PersonalFinancePlan.in

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Should you go for HDFC Green deposits, SBI Platinum deposits?

Personal Finance

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Last week, housing finance company, HDFC and the country’s largest bank, SBI launched new fixed deposits. While the HDFC Green & Sustainable Deposit is targeted at those motivated by the ESG (environmental, social, and governance) theme, the appeal of SBI’s Platinum Deposit Scheme lies in the slightly higher rates compared to the bank’s existing deposit rates.

That said, these deposits don’t seem attractive, across both short (i.e. less than one year) and long tenures. There are many other higher-return fixed deposit options, both from banks and non-banking financial companies (NBFCs) that investors can consider. With interest rates expected to move up, though not any time this year, investors can go for 1–2-year deposits (and not very long-tenure ones) to benefit from a potential rate hike.

SBI Platinum doesn’t shine

The scheme comes with three tenure options – 75 days (2.5 months), 525 days (around 1.5 years) and 2250 days (6 years and 3 months) with respective interest rates of 3.95 per cent, 5.10 per cent and 5.55 per cent for under ₹2 crore deposits. These rates are 0.05 to 0.15 percentage points higher than those offered on SBI’s existing deposits of such tenures.

Senior citizens get 4.45 per cent and 5.60 per cent on the Platinum 75 days and 525 days deposit respectively. Platinum 2250 days deposit offers 6.20 per cent (rate applicable on the SBI WECARE Scheme), an extra 0.65 per cent for senior citizens. The Platinum deposit scheme is open for investment until 14 September 2021.

Deposits from the Post Office and many public sector banks are a good alternative to SBI Platinum deposits. The ultra-safe Post Office 1-year and 2-year time deposits (interest paid annually, calculated quarterly) offer 5.5 per cent per annum.

This is better than the 5.10 per cent offered to non-senior citizens on SBI’s platinum 525 days deposit.

Many other public sector banks too offer 5.10 -5.20 per cent on their 1-2-year deposits. SBI’s 5.6 per cent for senior citizens is a tad better than the 5.50 per cent on Post Office deposits but is similar (5.60 – 5.70) to that on many public sector bank deposits.

HDFC green deposits flash amber

HDFC’s Green & Sustainable Deposit (Green Deposit) is for those enthused by the popular ESG theme. Money mobilised through these deposits will be used to fund projects supporting the UN’s sustainable development goals. These deposits have tenures ranging from 33 to 120 months and interest rates from 5.75 to 6.55 per cent per annum on deposits of up to ₹2 crore. Deposits of up to ₹50 lakh will get 0.10 per cent more if booked online. They come with monthly, quarterly, half-yearly and annual pay-outs, and a cumulative option. The deposits have the highest ratings of FAAA/Stable by CRISIL and MAAA(stable) by ICRA.

While there are a few ESG-themed equity MFs in India, there are no such debt funds. We compare HDFC’s Green Deposit with other regular FDs from NBFCs. Unlike bank deposits, NBFC deposits are not protected under DICGC’s insurance cover of up to ₹5 lakh (principal and interest). From a safety perspective, it’s best to invest only in AAA-rated NBFC deposits.

Purely based on returns, other AAA-rated NBFC deposits offer a better deal compared to HDFC’s Green Deposits. Also, minimum tenure for Green Deposits is as high as 33 months. Other regular NBFC deposits, with 1-year and 2-year tenures, may be more suitable given low interest rate scenario.

Given that the minimum tenure of 33 months itself is on the higher side, we restrict our comparison with peers to only this tenure. Even here, green deposits don’t score. The 33-month Green Deposit offers rates from 5.90 to 6.10 per cent per annum on the non-cumulative options and 6.10 per cent per annum on the cumulative option.

But HDFC’s 33-month regular deposit offers 0.10 per cent higher on each of the respective options. That is, 6.0 per cent for the monthly, 6.05 per cent for quarterly and 6.10 per cent for half-yearly pay-out option, and 6.20 per cent both for annual pay-out and cumulative option. HDFC’s regular deposit rates are a tad better than those of the financially strong Bajaj Finance’s AAA-rated deposits rates as well. Senior citizens get 0.25 per cent more per annum on all these deposits.

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