Medium-Term Investment Options

Medium-term investment options

      I.        Medium-term FDs:

Medium term FDs can be your best bet if you need money in 1-5 years for a specific purpose like buying a car etc. It is better to opt for bank deposits over company deposits, which do offer high returns but are risky. The medium-term FDs provides higher interest rate than short-term FDs and it is as safe also. If you think that you are going to need this money at a particular time, it is better to shift that money from your saving account to medium-term fixed deposit.

    II.        Debentures

Debenture holders are merely money lenders who are giving the company a loan. Debenture holders have no rights in the internal matters of the company, but this also means they do not have to share the company's losses. They are not part owners of a company.

Debenture holders are normally entitled to a return equivalent to a fixed percentage of their initial investment and this is usually an annual payment. Debentures might be secured on the assets of a company either through a fixed charge (paired with a specific asset) or a floating guarantee over the general assets of the business. The security inherent in debentures makes them a “safer” investment than shares. Debenture holders get a fixed rate of interest whether or not the company makes a profit.

   III.        Debt funds

Debt funds are an investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The main advantage of debt funds is relatively lower risk and steady income additional to liquidity of investments, professional fund management expertise at low costs besides diversification of portfolio to have a balanced risk return profile. A fund invests in range of securities leading to diversification of risk. Also, certain funds offer regular income schemes where the interest payment is given to investor for his investment at regular intervals. Debt funds also tend to perform better in periods of economic slowdown. Debt should be looked upon as an effective hedge against equity market volatility, which lends stability in terms of value and income to a portfolio.

   IV.        Fixed Maturity Plans

Fixed maturity plans are similar to FDs in that they have a pre-determined tenure (say 3 years like the maturity of an FD) ranging from a few weeks to a few years. The money is invested in fixed-income assets like certificate of deposits, commercial papers, money market instruments, corporate bonds; debentures of reputed companies or in securities issued by government of India and fixed deposits selected by the fund manager. These have lower risk of capital loss due to their investment in debt and money market instruments and are least exposed to interest rate risk as the fund holds the instruments till maturity getting a fixed rate of return. Here, fund managers primarily invest in AAA or such kind of good rated credit instruments with maturity profile of the securities in line with the maturity of the plan so there is also low credit risk with minimal liquidity risk involved. FMPs are schemes with a pre-specified tenure. The basic objective is to generate steady returns over a fixed period. Thus, investors are assured of returns if they stay in these products for the entire period.

Since these products are of different maturities, investors have the option of buying schemes that suit their requirements. FMPs have better tax efficiencies whether you invest in the short term or in the long term. The long-term capital gains (investment of more than a year) enjoy indexation benefit (Indexation is a technique to adjust income payments by means of a price Index , in order to maintain the purchasing power of the public after inflation).Importantly, if you stay invested for just over a year, there are double indexation benefits. For instance, if you buy an FMP of 14 months in February 2010, scheme will mature in April, 2011. In this case, the investor will get inflation indexation benefits for the years 2009-10 and 2011-12. So, the main advantage of FMP's is that you can take into account inflation while calculating your taxes which means that your after-tax return may be superior to FDs, especially if you lie in the top income tax bracket. In case of short-term capital tax, it is similar to interest income from bank fixed deposits. The returns are added to the income of the investor and taxed as per his/her slab.

The major drawback with FMPs is that the latter does not assure you any guaranteed returns. However, while buying it, one can look at the returns that are being offered at a particular time. Moreover, these schemes are not-so liquid since they have to be listed at the stock exchanges, exiting before the scheme matures is difficult.

FMP’s are investment options for sure if you want to park your money for short term. They are more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed, they are almost risk free (remember almost). One may ask if FMP does really give better than returns then FD’s and practically as safe as FD’s why people don’t invest in these. The answer is that there is no awareness among people and they have less risk taking attitude.