Saturday, 2 September 2017

High Paying Alternates to Fixed Deposits

Fixed deposits have long been holy grail of investments in India. People across generations have considered FDs as the synonym of savings in India. 8% assured returns without any tension of market vagaries and volatilizes has ensured that people have utilized FDs for everything and anything, ranging from Retirement planning to Kids' education to Kids' wedding. But off late this situation is changing and returns on FDs are consistently on a downward spree. Nowadays highest interest rates of FDs vary from 6% to 6.5%. 

This reduction in interest rates has been followed by restlessness among the loyal investors of FDs, who have never explored anything to invest into beyond FDs. Through this article I will cover alternates to FDs which are safe and still provide returns which are comparable to, if not more than what FDs provide. 



First alternate is Liquid Funds. Liquid funds are debt funds which invest into debt papers of very short duration like 15 days to one month. They are used by investors to park funds that maybe required at very short notice. They don't have any Exit Load and hence you can redeem them anytime without any penalty to you.Its taxation is better than the taxation of FD or saving account.If you keep it for more than 3 years, then it will be less than 20% , against 30% in FD. If you keep it for less than 3 years , taxation will be same as FD or saving account interest.Read about their taxation in Debt Funds - The Tax Warrior against FDs.

As FDs are preferred for ensuring capital protection (i.e. no loss of the invested amount), liquid funds are a good alternate to FDs because of their very conservative investment philosophy. Below is Fund performance (as of 2nd Sep'17) of major liquid funds available in the market - 


Fund1-Year3-Years5-Years10-Years
Escorts Liquid Plan6.968.178.788.72
Peerless Liquid Fund - Regular Plan6.987.888.48-
Aditya Birla Sun Life Floating Rate Fund 6.847.878.428.08
Indiabulls Liquid Fund6.927.938.41-
JM High Liquidity Fund6.897.898.417.97
Aditya Birla Sun Life Cash Plus6.767.838.398.07
Kotak Floater Short Term Regular Plan6.827.868.397.97
Baroda Pioneer Liquid Fund6.817.868.38-
Tata Money Market Fund - Regular Plan6.87.818.388.03
Invesco India Liquid Fund6.87.838.368.01
Principal Cash Management Fund6.847.868.367.96
ICICI Prudential Liquid Plan6.777.88.358.06
Reliance Liquid Fund Institutional Plan6.87.818.357.99
Axis Liquid Fund6.827.828.34-
UTI Money Market Fund - Institutional Plan6.797.818.34-
DHFL Pramerica Insta Cash Plus Fund6.817.858.33-
ICICI Prudential Money Market Fund6.787.818.337.55
Kotak Liquid - Plan A6.767.798.338.01
L&T Liquid Fund6.87.818.337.91
Sundaram Money Fund - Regular Plan6.757.778.337.97
HDFC Liquid Fund6.687.768.327.9
Reliance Liquidity Fund6.727.778.328
BOI AXA Liquid Fund - Regular Plan6.787.778.31-
IDFC Cash Fund - Regular Plan6.717.788.31-
SBI Magnum InstaCash Fund6.767.788.317.84
Tata Liquid Fund - Regular Plan6.747.768.37.96
UTI Liquid Cash Fund - Institutional Plan6.797.788.37.95
DSP BlackRock Liquidity Fund - Institutional Plan6.727.758.297.82
BNP Paribas Overnight Fund6.747.728.288
SBI Premier Liquid Fund6.667.738.287.87
LIC MF Liquid Fund6.737.778.277.95
HDFC Cash Management Fund - Savings Plan6.587.688.267.94
Canara Robeco Liquid Fund - Regular Plan6.637.678.25-
IDBI Liquid Fund6.77.718.24-
Union Liquid Fund6.577.638.24-
Edelweiss Liquid Fund - Regular Plan6.57.428.11-
Mirae Asset Cash Management Fund6.627.387.76-
SBI Magnum InstaCash Fund - Liquid Floater5.857.067.757.63
Reliance Liquid Fund - Cash Plan5.867.027.616.91
L&T Cash Fund5.496.77.457.44
HDFC Cash Management Fund - Call Plan5.996.767.336.78
Taurus Liquid Fund - Regular Plan0.845.857.22-
Reliance ETF Liquid BeES5.056.056.496.47
Franklin India Cash Management Account Fund5.96.186.486.04


Next alternate to FDs which is safe and provides good returns is Arbitrage Fund. Arbitrage funds exploits price differential in different markets for same asset. Like e.g. a stock is available for higher price in BSE than price in NSE, so an arbitrage fund manager will buy stocks from NSE and sell in BSE. Such price differential arises for a very small time like 5-10 seconds and are readily capitalized by fund managers. As they undertake transaction only when price differential exists, Arbitrage funds provides capital protection to a very large extent. Best feature is their tax treatment which is nil taxation after one year and 15% tax on gain if investment is redeemed within one year. Below is the performance (as of 2nd Sep'17) of some major arbitrage funds - 


Fund1-Year3-Years5-Years10-Years
IDFC Arbitrage Fund5.786.657.547.08
Invesco India Arbitrage Fund5.716.777.257.12
SBI Arbitrage Opportunities Fund5.676.67.47.26
JM Arbitrage Advantage Fund5.786.657.527.35
UTI SPrEAD Fund5.876.757.187.43
ICICI Prudential Equity Arbitrage Fund5.96.867.887.46
Kotak Equity Arbitrage Fund6.036.917.797.51
Indiabulls Arbitrage Fund6.13---
Principal Arbitrage Fund4.98---
Edelweiss Arbitrage Fund6.057.14--
DHFL Pramerica Arbitrage Fund6.147--
L&T Arbitrage Opportunities Fund6.036.87--
Axis Enhanced Arbitrage Fund6.226.72--
Reliance Arbitrage Advantage Fund5.986.977.69-
Aditya Birla Sun Life Enhanced Arbitrage Fund5.866.827.44-
IDFC Arbitrage Plus Fund5.656.557.32-

As can be seen Liquid Funds and Arbitrage Funds , not only provide higher returns than FDs, they also enjoy better tax implications. Read about another alternate to FDs in Debt Funds - The Secure Mutual Funds

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