Sulochana Rakshit, the owner of a boutique in Calcutta, and her engineer husband were supposed to meet a financial advisor from Tata AIG Life Insurance Company last week. The couple wanted to park their money in a unit-linked insurance plan (Ulip) to get a life cover as well as enjoy tax-free dividends arising out of equity investments made by the insurance scheme.

The week opened with Lehman Brothers of the US going belly up, Bank of America buying Merrill Lynch and American International Group (AIG) approaching the US government to help it come out of the financial mess. The result: stock markets across the globe witnessed a free fall over the next three days.

AIG holds a 26 per cent stake in India’s Tata AIG Life Insurance.

“After all this, we decided to cancel the appointment and instead put our money in a bank fixed deposit where it will be safe and fetch an assured 10 per cent interest,” said Sulochana.

Gullible investors, who entered the capital market as late as January this year when stocks were sizzling, are finding it hard to digest this gut-wrenching volatility.

In such a scenario, there are three options that can be seen as safe haven investments — a physical asset such as gold or a house, assured income instruments such as bank fixed deposits and fixed maturity plans (FMPs) of mutual funds.

Physical assets

Physical assets, unlike paper-based financial assets, have intrinsic value (determined by their cost of production) that prevents their price from falling to zero. Hence, physical assets are considered to be the best hedge in times of a financial crisis.

Among physical assets, precious metals, particularly gold and silver, have the highest liquidity. Moreover, one can hold physical gold in a paper form, called exchange-traded funds (ETFs), and do away with all incidental costs, such as rent for safe deposit lockers.

ETFs are more liquid because these can be traded on the stock exchanges where they are listed.

In the last 15 days, gold ETFs gave a return of 13.42 per cent, while debt funds generated a maximum of 4.66 per cent and equities fell more than 11.5 per cent.

However, the rise in the price of the yellow metal over the last fortnight was preceded by a steep fall to $740.75 a troy ounce in the international market from $973 two months ago. Gold price in the international market is currently hovering around $840 an ounce.

It is difficult to say whether the time is right to buy gold. In the international market, gold price reached its historic high of $1,002 in March this year and since then has fallen 16.17 per cent.

This means that from the current level there is an upside of 19.28 per cent if gold price has to scale its peak again.

A sharp rise in gold prices is possible if crude jumps to $150 a barrel, dollar depreciates sharply and the current financial crisis deepens.

This seems a distant reality with the central banks of developed countries coming together to create a $180-billion pool to tackle the credit crisis.

There has also been a steep correction in crude price from $147 a barrel to below $100 and the US dollar, too, has appreciated against major currencies over the last few weeks.

Patient watch

Existing investors in physical gold or ETFs can wait for a few more days to get a better price to exit. Fresh investments in physical or gold ETFs at this juncture will be similar to that of buying equity when the sensex was above the 20000-level.

Investment in real estate will not yield the desired result because lending rates as well as realty prices are quite high at present.

Selling a property will also not be a good idea. Real estate prices in the metros have not seen any appreciation in the last four months and in some cases, prices have declined marginally because of poor demand. Given the high lending rates, renting a house is now cheaper than buying it.

Bank fixed deposits

Banks are offering a 10 per cent plus interest rate on deposits for one year. Even deposits for three to five years can fetch an annual interest rate of 9.5 per cent. The interest on bank fixed deposits is compounded quarterly. Thus, a 10 per cent annual interest for one year yields a return of 10.38 per cent and a 9.5 per cent rate yields an annualised return of 11.98 per cent.

However, bank deposits come with the TDS rider. If one’s annual interest income from all accounts in a particular bank branch is more than Rs 10,000 in a year, the bank will deduct a tax at source while crediting the interest to the account.

One will also have to show the interest income as “income from other sources” in the tax return file. A taxpayer will have to pay income tax on the interest income according to the tax bracket. The post-tax return from bank fixed deposits will, thus, be much lower.

Fixed maturity plans

Among all mutual fund debt schemes, fixed maturity plans (FMPs) are the most remunerative at present. When the interest rates and inflation are high, open-ended debt schemes lose their capital value. But in fixed maturity plans, the debt/bond papers are held to their maturity and there is a little chance of any loss in capital value in these schemes as they are close-ended .

Fixed maturity plans offer a return of 11-11.50 per cent for a one-year maturity period. This is higher than what bank fixed deposits of the same maturity profile offer.

FMPs also fare well over bank fixed deposits in terms of tax relief (see chart).

However, one should be careful while choosing FMPs indicating a much higher yield than their peers. FMPs invest in private corporate bonds.

When credit is not easily available from banks, companies often float bonds and debentures offering high coupon rates.

An FMP’s indicative return thus depends on the financial health of the company issuing the bonds/debentures to honour the repayments of these papers on maturity.