Manoj, 40, plans his investments diligently. But one year’s savings plan is hardly different from another — he puts most of his money in bank fixed deposits and buys some national savings certificates with the rest.

He has often dreamt of buying some company stocks, but feared he would lose his money. His priority has been to protect his capital and make some money, if possible. In the process, his savings kitty has hardly grown as bank deposit rates have gone from bad to worse.

Risk appetite

Manoj is not alone. An RBI report shows average Indians have similar risk appetites.

Mutual funds and stock investments account for less than 4 per cent of domestic household savings. Domestic households parked Rs 274,704 crore in bank fixed deposits and invested only Rs 21,139 crore in mutual funds and stocks in 2005-06. A year ago, mutual fund investments accounted for a paltry Rs 1,550 crore against Rs 158,393 crore in bank fixed deposits.

Simple plan

We have a simple investment strategy for people like Manoj, which will not only protect his initial capital, but also ensure a higher return than the amount he will earn by simply putting money into a bank fixed deposit. The tax implication of this strategy also works out in his favour.

Do what MFs do

The plan is similar to what mutual funds follow in their capital protected funds.

Almost all mutual fund houses now offer close-ended capital protection-oriented schemes. The fund manager invests a part of the corpus in government securities and debt papers that have the same maturity value and maturity period as the scheme. The fund manager, therefore, ensures that the maturity value of the debt papers is equal to the sum invested by investors. The remaining sum, if any, is then invested in stocks.

Sample this

Fund house A mobilises Rs 100 under its five-year close-ended capital protection scheme. The fund manager will invest in a government security or debt instrument that have a maturity period of five years and a maturity value of Rs 100.

If the debt paper is now available at Rs 80, the fund manager will invest Rs 80 out of Rs 100 mobilised under the scheme and will put the remaining Rs 20 in stocks. While the debt investment takes care of capital protection, the equity investment promises capital appreciation.

Avoid paying tax

Now apply this strategy to your investments. Let’s assume you have a surplus of Rs 1 lakh. If you keep it in a five-year bank fixed deposit that gives a 9.75 per cent interest per annum, you will get Rs 161,874.86 on maturity (interest on bank fixed deposits are compounded quarterly). However, the bank will deduct tax at source on the interest income every year as the annual interest will be Rs 10,112.31 —more than the threshold limit for TDS.

Split up the surplus

Split your Rs 1 lakh surplus into two parts. To get Rs 1 lakh on maturity after five years, you need to put only Rs 61,782.60 in a fixed deposit bearing an annual interest rate of 9.75 per cent and the interest amount credited to your account would be Rs 8,030.25 only (well below TDS limit).

The remaining Rs 38,217.40 you can invest in mutual funds or stocks for five years. Experts expect a 15 to 18 per cent annual return from stocks over the next five to seven years given the growth in the economy.

Steady rise

“With an economic growth rate of 8 per cent and an inflation rate of 5 per cent, one can expect a 15 to 18 per cent rise in corporate earnings, which will get reflected in their stock prices over the next five to seven years,” said Sanjaya Kulkarni, managing director of Indian Direct Equity Advisors, a private equity management firm.

At a compounded annual return of 15 per cent, your investment of Rs 38,217.40 would grow to Rs 76,868.84 after five years. So, at the end of five years you get Rs 1 lakh from the bank fixed deposit and Rs 76,868.84 from stock investment.

This strategy will generate Rs 14,994 more for you. You don’t have to pay any capital gains tax on your stock investment of Rs 38,217.40 since it is held for more than 12 months.

If you invest Rs 38,217.40 in an equity-linked savings scheme instead of any other mutual fund or individual stock, you can also claim tax deduction for the amount under section 80C.