Interest rates are low, ruling out investments in debt. Equity investments seem too risky and anyway you are not bothered about monitoring movements in share prices or even finding out which are the best shares to invest in.
Initial public offers may be better, but then look at what is happening in the ONGC (Oil and Natural Gas Corp) case. Too much stress, plus you have to either hold on to the shares allotted for a long time or sell it on the day they are listed.
Ideally, you want an investment where the returns are fixed so you do not have to agonise over it, plus there should be enough liquidity so you can quickly exit.
In that case the best bet is fixed deposits -- the old favourite. But didn't we say at the beginning that interest rates are low? That's okay.
Assume for an instant that you have Rs 500,000 spare cash with you and there is a bank offering fixed deposits at 4 per cent interest for three months, on a compounded basis.
You will be richer by 5,000 at the end of three months. Or take it for 180 days with the 4 per cent being compounded monthly and you have a neat profit of Rs 48,000 at the end of six months. Not bad, huh?
The fixed deposits are fairly safe -- at least if you have done some preliminary homework and not put it into some plantation company. In the above example you had put it into a bank.
What was that you said? Four per cent is not enough? It will not yield enough to support you in style? Then, dear investor, you need to broaden your horizons a bit. Look at one year instead of 90 days or 180 days. Ballarpur Industries is offering 8 per cent interest, compounded quarterly for a one-year fixed deposit.
If you calculate how much that will amount to -- your effective interest rate would be 8.24 per cent per annum. Or there is a company called Borosil Glass Works, which is offering a one-year deposit at 10 per cent per annum compounded half-yearly.
Nobody has really looked at company fixed deposits. Agreed there have been considerable instances in the past of companies not bracing up at the end of the tenure and not returning the depositors' money.
But there is a tried and tested formula for success. Stick to safe and sound companies. CESC, for instance, is offering a one-year term deposit for 8 per cent. The company is a power utility and is part of the RPG Enterprises and you can be sure that they will not renege on their commitments.
A little bit of spadework should not hurt here. If you are in the habit of scanning financial papers, these regularly put out ratings changes by credit rating agencies.
These are a good indicator of whether the company plans to freeze on to your money or have honourable intentions to repay you at the end of the fixed deposit period. A good thumb rule is, lower the credit rating, higher the interest the company is going to pay out.
Another thing to look out for is the compounding frequency. The more the frequency the more will be your effective rate of interest. In case you do not know what compounding is, it works this way -- if you have put in Rs 100 at an interest rate of 4 per cent, at the end of one month you have Rs 104.
If the compounding is monthly the next month your interest will be applicable on the Rs 104 and so you have around Rs 108 at the end of the second month and so on. There is sufficient amount of money to be made with existing instruments without having to run around and invest in risky instruments.
In the case of fixed deposits, the only risk one can think of is the company packing its bags overnight and decamping. But that risk can be averted, as stated before, by sticking to well known companies.
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