Not much variety on offer

Suresh Krishnamurthy

THE number of options in fixed-income investments has certainly increased over the years.

There are several `income option' mutual funds to choose from; one can invest in government securities; and the traditional forms of investment — fixed deposits, bank term deposits, and government small savings schemes — are still available.

That, however, has not made any significant difference. This is because there is no distinction between one investment option and the other. The only borrowers remaining in the market are the government, banks and large companies.

Irrespective of whether you invest directly or through mutual funds, the exposure is only to this select bunch of borrowers. With such limited variety on offer, investors neither get the kind of portfolio diversification that they may desire nor are the yields from the various investment options very different.

There is, however, one investment option that investors can fruitfully exploit. That is insurance. Specifically, LIC policies, such as Bima Nivesh, and pension policies, such as New Jeevan Akshay and New Jeevan Dhara. Even investors who do not need tax savings can choose these policies as returns are attractive.

The returns are attractive mainly because of the tax-exempt status of the proceeds received on maturity. The single-premium policies offered by many of the private insurance companies are also worth looking at, especially for diversification. Here, too, the returns are attractive. For investors yet to step into the world of insurance, these policies offer an attractive route to divert their savings.

Otherwise, the government small savings schemes are the next best in terms of returns. For an investor not in search of tax savings, the attractive investment options among small savings schemes are Post Office Monthly Income Scheme, Post Office Time Deposit, Government Relief Bond, and Kisan Vikas Patra.

The returns offered by all these investment options are much higher than that offered by banks, government securities and top- rated large companies. For example, the interest rate on a five- year post-office time deposit is 9.0 per cent. In contrast, the yield offered by a five-year government security is less than 7.5 per cent. In particular, the combination of post-office monthly income scheme and post-office recurring deposit (investing the monthly income in the recurring deposit scheme) could prove rewarding.

However, post-office schemes are attractive only for investors who do not have any exposure or have only a small exposure to these investment options. For investors who already have significant exposure to small savings schemes it may be inappropriate to keep adding to their exposures. This is because of the nature of the scheme.

The committee set up to review the system of administered rates has said that the ``ponzi nature of the scheme persists on an enduring basis'' because of a few factors. Given this backdrop, it may be better to attribute an element of risk to investment in small savings and, therefore, monitor exposures accordingly.

This is not to suggest that there is a default risk. However, if State governments default, the Centre would be in a quandary. In such a case, the Central government may come out with a restructuring scheme that would require some sacrifices to be made by the investors. Overall, such sacrifices can bring down the yield on the investment. After the US-64 debacle, these scenarios need to be considered seriously.

Apart from small savings and insurance policies, the investment options on offer do not appear too appealing. Investors, however, do not have a choice.

A few companies in the finance and manufacturing sector offer good returns. For example, companies from the TVS Group, such as Wheels India in the South, and companies such as Punjab Tractors in the North, continue to offer attractive returns.

But such attractive options are rare. Investors have to invest mainly in low-return but low-risk investment options.

Mutual funds remain more attractive than these investment options because of their tax efficiency and liquidity.

In this backdrop, exposure to the manufacturing and finance sector is best obtained through the mutual fund route.