2004 was undeniably a challenging year for the risk-averse investor.

Rising rates meant that investors locked in long-tenured 'assured return' schemes suffered notional losses; also the axe fell on schemes like the 6.5% (Tax Free) GoI Bonds leaving risk-averse investors with fewer options to choose from.

In light of such events, we present strategies for the risk-averse investor in 2005.

The small savings segment

We at Personalfn believe that the small savings segment which comprises schemes like the National Savings Certificate (NSC), Post Office Monthly Income Scheme (POMIS) among others is due for a significant overhaul.

Not only are the rates (administered at present) likely to be trimmed down and converted into market-linked ones, we may also see some of the schemes being scrapped.

Recommendations to this effect were made in the report submitted by the Rakesh Mohan Committee on Small Savings. While some of the recommendations like scrapping of the 6.5% (Tax Free) GoI Bonds have already been implemented, other recommendations could be executed in the forthcoming Budget.

Apart from the attractive returns and high safety levels, tax benefit is another alluring factor. Assessees are entitled to claim tax benefits under Section 88 and Section 80L amongst others, for investments in specified instruments.

This is another area which may come under the scanner soon; a rationalisation of tax sops could be on the anvil.

What should investors do?

The new structure of small savings schemes may not appeal to some investors. Market determined rates coupled with fewer choices could be a difficult proposition for investors used to seeing a variety of high-yielding investment options.

On a positive note, the changes incorporated will not have any impact on existing investments. Investors can lock-in their investments at existing rates; this will insulate such investments from future changes in interest rates.

Similarly, the committee has suggested that the Public Provident Fund (PPF) should be permitted to continue in its present form. Long tenure and poor liquidity notwithstanding, investors can allocate a higher portion of their investible corpus to this scheme.

The fixed deposits segment

Any rise in interest rates can hit those invested in 'assured return' instruments like fixed deposits. A hike in interest rates implies that existing investors continue to clock returns at historical (lower) rates, while new investors earn returns at higher rates.

The 'fixed' nature of returns could become a drawback for fixed deposit investors. Of course, if rates remain flat or fall, then existing fixed deposit investors will have made a smart move by locking their fixed deposits at higher rates.

What should investors do?

Don't invest in long-tenured fixed deposits, say, of more than three years. Second, investors could contemplate getting invested in variable rate deposits wherein the interest rate is aligned to a specified benchmark rate. In case of an upward revision in interest rates, investors will be able to benefit from the uptick

Finally, resist the temptation to rake in higher returns by investing in company deposits; these deposits are unsecured in nature, therefore investing in the same entails taking on higher risk.

Stick to deposits that carry a 'AAA' rating, indicating the highest level of safety, even if that implies compromising on the returns.

Transition to the 'market-linked' investments segment Going forward, it is highly unlikely that all investors will have the opportunity to rake in higher returns at lower risk levels.

We could see more schemes like the Senior Citizens Savings Scheme for instance, which offers attractive returns only to a targeted segment. For a significant chunk of the investing community, the new mantra is likely to be 'take on higher risk, if you wish to rake in higher returns.'

In other words, the transition from investing in attractive 'assured return' instruments to market-linked instruments will have to be made if smart returns are to be clocked.

What should investors do?

Investors should exercise the option of utilising the mutual funds route and investing a portion of their corpus in hybrid instruments like monthly income plans (MIPs) and balanced funds.

We are not recommending that investors disregard their risk-profile for raking in higher returns; however a small portion of their corpus can be invested in market-linked instruments.

As a result, while conventional avenues like fixed deposits and small savings schemes would be the mainstay of the portfolio and provide stability to the same; the portion invested in market-linked instruments can provide the much needed impetus.

Choosing the right investment advisor will be of paramount importance as well. Select an advisor who is certified, and can provide you with objective advice for investing in schemes that are best suited for you.

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