Beating the Bank FD

Most of you reading this know that there are three kind of runs in the market:

1. Bull Run - Where the stock prices & all businesses tend to soar creating capital
2. Bear Run - Where pessimism spreads & capital is eroded
3. Consolidation - Where there is a lot of indecision; neither capital is created or eroded and everyone is waiting for the next move

More often than not, I personally am looking for a return of close to 15%. However I've met my fair share of elder investors and with age they're looking for a safer return rather than have a benchmark return figure.

More conversations I have more I realize that they're simply looking for the Bank FD return. If you can offer a product that has the simplicity and the safety of a Bank FD return they're more than happy.

So, I started looking!

Here are a few products I've classified that you can look it for higher returns:

1. Corporate FD - Returns are more often than not higher than a Bank FD and specified in the offer document. Best I have seen was a 12% return offered by the Tata group which was a safe bet when the bank FDs were close to 8.5% so beat the bank FD by 3.5% which was good enough for the risk I was taking.
2. Fixed Maturity Plans and Interval Funds offered by Mutual Fund AMCs - An assured return product but sometimes the returns might be similar to the Bank FDs or even lower. Try to look at their investment mix to get an idea of the returns and the risks. Best I've seen is a 10.10% return on an FMP consisting of Bank CD portfolio. Bank FDs during the same period were around 9%. However with the help of indexation and proper tax planning I could get that complete return tax free whereas that 9% bank FD return dropped to ~7% due to 30% tax bracket. Again beat the Bank FD by 3%.
3. Monthly Income Plan offered by Mutual Fund AMCs- This is a bull run product according to me. These plans would invest 65% to 80% of the money in debt instruments and the rest in the equity market depending on which scheme you invest in. During the bull run this product will beat Bank FDs by a considerable margin. I say this because during bull runs more often than not Bank FD rates are cooling down. The best spread I saw was the MIP return at 15% with the Bank FD return at 8%. Again beating the Bank FD by 7% which is huge!!
4. Arbitrage product offered by National Spot Exchange - This product offered a return between 9% to 17% depending on the liquidity in the system. The return was know before the arbitrage trade was undertaken and I myself managed to get a 14.14% return.

Risks of the aforementioned products:

1. Corporate FD -  As far as the risks are concerned, you have to look at the numbers on their books and understand where the money they need is going to be utilized. Also, look if the debt is secured or unsecured. Read up on their credit rating reports. Look at the track record of the Group. All of this still won't assure you if your money is coming back to you.
2. FMP and Interval funds - You need to take a look at where the AMC is deploying the money. If the portfolio consists of companies with junk credit ratings the risk is similar to a corporate FD. So don't get lured in the next time your advisor tells you that the FMP return is at 12%. Ask him or the AMC to give you a break up of the portfolio mix. In my opinion a bank CD portfolio is safe but do consider the banks they're investing in at that point. If they're going to invest in a bank going broke you're better off avoiding it. For e.g. if they were to invest in Citibank during 2007-2009 period, you were better off depositing your money in SBI FD. 
3. MIP - This product has a mix of equity which goes as high as 35% so please be careful because if the equity markets do not perform well, don't be surprised if you see a negative return on your investment.
4. Arbitrage Product by NSeL - The spot exchange has put in some solid risk management systems in place, but if the exchange goes broke you're not getting your money back let alone the interest generated. However if the exchange does not go broke, you're assured of the return you could see before undertaking the trade. Amount, % return and date at which you would get the amount is guaranteed. 

Do share your thoughts and any other products you might have in mind by the way of comments or a simple email on dewang@denip.in.

PS: If one of you could proof read this, I would appreciate it!

Thanks,

Dewang K Mehta

DENIP Consultants Pvt. Ltd.