Inflation – the Termite for your corpus
Inflation is something we face daily, but we don’t take it seriously enough to consider how it influences our financial lives. Whenever we go out to buy groceries or any necessity, we get lesser quantity over the years with the same money – this is inflation hitting us squarely in the face. It gradually decreases our buying power which is not just limited to what we can see visually but to everything where our money is involved – directly or indirectly.
Inflation is rising year-on-year officially by around 5% to 6% in India. But please remember that this is the inflation of what a common man – read: lower middle class in rural India – buys. Most of us spend most of our money on ‘luxury’ items like cars, eating out, entertainment, costly higher education, marriages, clothes more than our requirement, gadgets and Amazon, where inflation is much higher. A high rate of inflation and poor returns on your savings are digging holes in wallets and savings accounts. Instead of just saving, we must start investing.
By following some simple tips, we can protect our life’s savings from eroding at much lower rate.
1) Put equity ahead of debt. To achieve critical long-term goals such as education, marriage, and retirement planning, your investment should be in securities that outperform inflation rather than be in so-called ‘safe’ products which will surely erode your money’s buying power at a fast pace.
2) Maintain strict financial discipline. In order to get out of your financial commitments and obligations, pay your costly loans as early as possible and do not roll over payments on your credit cards.
3) Create a budget. Creating a budget is always beneficial for tracking unnecessary expenses. Watching what you spend and living within your means will help you stay on track and save money for investing.
Therefore, keep a track of your expenses, avoid unnecessary loans, and invest wisely in order to beat inflation over the long term. Ensure that your money multiplies so that you can enjoy the same standard of living over the years. If in doubt, contact us how to do it.
(Contributed by Nidhi Dogra, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)
Perpetual Bonds – good returns for perpetuity
Bonds are fixed-income instruments, which usually have a defined maturity date, but a perpetual bond is a unique kind of bond that has no maturity date. It means, at least theoretically, investors may not get their principal back, but get a very good interest forever!
Wait, don’t fear – we’ve just given out the theory part of Perps to you😊
Perpetual Bonds have a call option available through which the issuer can call back the bond and pay back the principal to the investors. Typically, this option is available 5 years after the issue and we have generally seen all the callers asking the bonds back after 5-7 years. Also, the investors can use the secondary market as a means of exit in the case of traded perpetual bonds but typically the trades are very thin there.
Who issues Perpetual Bonds?
Perpetual Bonds are primarily issued by government entities and banks.
Pros of Perpetual Bonds
- Indefinite Interest Payment – The major benefit of these bonds is that you receive steady interest payments forever till the call option is exercised. And since the bonds have long investment periods, the rates of interest on these bonds are generally much better than FDs and similar instruments. Eg, 7.5 – 8% for PSU banks like SBI and Canara Bank right now when their FDs are getting 5.5-6%.
- Source of fixed income – The regular interest payment serves the purpose of the fixed source of income.
Cons of Perpetual Bonds
- Callable Uncertainty – There is uncertainty about the exercise of the call feature by the issuer.
- Conversion to equity – One of the major risks involved with these bonds is that the issuer can convert them to equity in a dire situation, as happened in the case of Yes Bank, but that was actually an isolated case.
These bonds can be included in the investor’s portfolios as a part of long-term investing strategy for predictable safe returns for long time periods. By taking high-quality rated bonds issued by issuers like SBI, Bank of Baroda, PNB etc, one can get such high rates with almost negligible risk.
(Contributed by Yogesh, Associate Financial Planner, Team Vikrant, Hum Fauji Initiatives)
Corporate Bonds – good returns in shorter term
The previous snippet on Perpetual Bonds referred to safe, very long-term investment. What if you want safe returns but not for that long a term?
Corporate Bonds come in here. If selected properly, they can be extremely safe, fixed income instruments for a duration of shorter time periods like 1 to 5 years by investors. They would earn higher interest than bank FDs while giving you almost equivalent safety. Eg, LIC Housing Finance bonds maturing in a year and L&T Finance bonds maturing in 2 years are giving 6.6% rate of interest right now and both have the highest AAA rating.
Corporate Bonds are issued generally by large Companies.
They could be for durations of 1-10 years or even more, though generally they are taken for 1 to 5 years. They can help investors accumulate money for retirement, save for a college education for children, or to establish a cash reserve for emergencies, vacations, and other expenses, if one wants to take absolutely low risk.
It may be worthwhile to mention here that, like in bank FDs, interest received on all bonds and debentures – including the perpetual and Corporate bonds – are taxed as per one’s own income slab.
(Contributed by Priya Goel, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)