Which is a safe investment instrument available in the market today? This is the uppermost question in the investor's mind who have money but do not know where to invest it. In this article we have outlined two products, which are the safe and among the better fixed-income instruments.

The two investments GIANTS

Particulars	Relief Bonds	*Single Premium
Minimum Investment	Rs 1000	Rs 25000 (sum assured)
Maximum Investment	Rs 200,000 p.a.	Rs 500,000 p.a.
Tenure	5 years	10 years
Return	8% p.a.	Floating
Safety	High	High
Liquidity	Low	Moderate
Tax Benefits	Tax free	Tax free & Sec 88

* Single Premium from HDFC StandardLife Insurance

RBI Relief Bonds

This has been India's most wanted investment instrument for a long time now. The government has consistently brought down the rates (current 8% p.a.) on the relief bonds over a period of time (12% p.a. few years back). However, even at such a low rate of interest relief bonds works out to be one of the better fixed-income instruments. The only reason for this is it’s the very nature of assured tax-free returns.

Moreover, it has the highest safety as it is backed by the Government of India. The only drawback relief bonds have is the maximum limit of investment of Rs 200,000 p.a., which was imposed by the finance minister in the Union budget 2002-2003. However, in the recent finance bill the maximum cap of Rs 2 lacs has been removed for the retiring employees. They can now invest their entire retirement proceeds in relief bonds without any maximum limit.

Single Premium Bonds

Single premium bonds offered by various insurance companies are also attractive investments. However, most of the insurance companies offering this product have brought down their assured rate of return below 8% p.a. while some insurance companies are not assuring any returns and declare bonuses according to their performance. In our example we have taken the Single premium bond offered by HDFC Standard Life Insurance, which according to us is a unique and good investment product.

Herein, the investor has to pay a single premium of 95% of the sum assured e.g. if an investor is taking a policy of Rs 100,000 he will have to pay a single premium of Rs 95,000. The returns are in the form of bonuses and are not assured. The bonuses declared by the company are compounded annually on the sum assured i.e. Rs 100,000 in the above case and not on Rs 95,000, which the investor actually pays as the premium.

The investor can expect high returns from the single premium bond (also due to the fact that the returns are compounded). The investment pattern by the company in this product would be like a balanced fund i.e the investments would be made in both equities as well as debt instruments. Also, there is safety of principal i.e. the sum assured is guaranteed by the company, so the investor is taking exposure to equity without taking risk on his principal investment. Moreover, the bonus, once declared and attached to the policy, is guaranteed by the insurance company. These are also tax efficient as being an insurance product the returns are tax-free u/s. 10(10D) and the investor can also avail a rebate u/s 88 as per the revised rule.

Herein we have taken an illustration which are basically estimates based on the investment allocation of the product.

Particulars	Amount (Rs)
Sum Assured	25,000
Premium	23,750
Maturity Value	61,473
* CAGR	9.97% p.a.

* Compounded Annual Growth Rate

If an investor takes a policy of Rs 25,000 sum assured, his premium is Rs 23,750 (95% of the sum assured). Assumed that the company declares a bonus of 8% p.a. and a terminal bonus of 30% to be on a conservative side. The maturity value i.e. after 10 years what the investor will get is Rs 61,473 wherein the CAGR (compounded annual growth rate) works out to be 9.97% p.a. Also, if tax benefits are taken into consideration the actual yield will still go up as the returns would be tax-free and also the investor would get a rebate u/s. 88 as per the revised rule.

We would advise that if an investor has Rs 100 to invest without taking any risk to his capital he should put Rs 75 in the Relief bonds and the remaining Rs 25 in the Single premium bond or can allocate accordingly keeping in mind his investment profile. This would give a proper mix to his portfolio, as there is always a reinvestment risk in Relief bonds. In Relief bonds the rate of interest would be probably low after 5 years and the investor will have to reinvest if he desires so at a low rate of interest. However, the Single Premium gives a hedge against this, as it would be invested for 10 years.

If you are in Mumbai and are interested in investing in above instruments, mutual funds or other investments, please register here.

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