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MANAGING YOUR CASH

Return Of Bank FDs

see table

Sweep-in FDs with zero-cost premature withdrawal. While some banks treat withdrawals from FDs as loans, and charge you an interest at 1-2 percentage points above the FD rate, others charge no penalty on partial withdrawals.
Savings-cum-fixed deposits with ‘auto-sweep’ facilities. Money above a threshold limit in a savings account gets transferred to an FD.

If your main source of income is your salary, make use of your bank’s auto-sweep facilities so that every rupee of your salary works harder.

TAXATION

Thrown Down The Deep End
Tax-adjusted yields from Deep Discount Bonds (DDBs) are set to take a beating. As per the new rules, investors will now have to value their DDBs at market price on March 31 each year and the difference between the market value on that day and the market value on March 31 of the previous year will be taxable as interest income under the head, ‘income from other sources’. If they are held as stock-in-trade, the interest will be taxed as ‘income from business’. However, any loss in the difference of market values will be allowed. Now, though these bonds—which allow you to stow away even small sums of money for possibly more years than other instruments—have rated high with individuals, they are losing sheen. For instance, they are no longer great instruments for minors, since taxes cannot be deferred till redemption. The parent will have to calculate annual interest, and pay tax on it each year as long as the child is a minor.

To manage your money better, read Intelligent Investor or log on to www.iinvestor.com and also get personalised information and analysis from our experts who answer queries on small savings, insurance, loans, taxation, mutual funds and shares.

EXPERT ADVICE

Stocks
Q. How do interest rates influence share prices?
A. When interest rates go up equity prices should fall. This is basically due to the arbitrage opportunities available between the markets and how comfortable investors are with taking extra risk by investing in equities in a rising rate scenario. For instance, if rates are high and rising, the difference between equity return and return from fixed income instruments reduces.

If market participants feel that equity return, though higher, is not enough to compensate for the risk, they shift to safer fixed income instruments, leading to a fall in equity prices. In a low interest scenario, participants can borrow at lower rates and punt on the market, leading to higher equity prices.Companies, however, can borrow at lower rates and implement projects more profitably, leading to improvement in their valuation through higher equity prices.

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