What To Do When Interest Rates Are Near-Zero And You Need Income

What To Do When Interest Rates Are Near-Zero And You Need Income

What should investors do when bonds no longer generate meaningful income? Here are 3 steps to improve the income potential of your portfolio. Keerthana Tiwari and Preeti Kulkarni provide a final checklist of things to remember while filing your tax returns. Have you fully utilised the income tax benefit available under Section 80C of the Income Tax Act? If not, it may be a great time to sort out your investments and curb your income tax outgo.

If the Financial Crisis ushered in the era of “ultra-low” interest rates, the current pandemic took it a step further to bring about “near-zero” interest rates.  Forget about earning a decent return on bonds. 10-year Treasury bonds currently yield just 0.85% and investment grade corporate bonds pay just 1.75%. Short-term bonds and cash pay next to nothing.

Individual investors have long counted on bonds to produce income for their retirement. But the world has changed, and the Federal Reserve has forecasted rates to stay near-zero through at least 2023 (it could be worse as some countries, such as Germany, have negative interest rates). What should investors do when bonds no longer generate any meaningful income?

The chart below shows bond yields pre-Financial Crisis (2007) versus Today. The differences are striking. At the start of 2007, 10-year Treasury bonds yielded 4.7%. To earn that same yield today, you would need to buy not risk-free Treasury bonds, but instead risky high-yield corporate bonds, rated as low as single “B.”  These bonds are otherwise known as “junk bonds.”

What does that mean for investors? It means the bonds have a high risk of default. While Treasury bonds have zero default risk (backed by the full faith and credit of the U.S. Government), bonds rated single “B” have an average annual default rate of 4.2% over the last 40 years. The highest single year default rate was nearly 14%. In other words, buyer beware. What good is the promise of a higher yield today, if the bond defaults tomorrow?

Take these steps instead to increase the income potential of your portfolio:

  • Reduce Expenses – According to Morningstar, more than three-quarters of actively managed corporate bond funds underperformed their benchmark in 2019. Actively managed funds are expensive (usually 0.50% or more), which reduces the yield. Opt for passively-managed index funds instead, which are available at a fraction of the cost.
  • Reduce Taxes – Municipal bond index funds currently have almost the exact same yield as taxable bond index funds, plus you won’t pay any federal tax on municipal bond interest. Adding high quality municipal bonds to your taxable accounts may be a smart way to increase your after-tax income. After all, it’s not what you earn, it’s what you keep.
  • High Dividend Stocks – Dividend yields on stocks haven’t been this high relative to Treasury bond yields in at least 45 years. While avoiding dividend traps often found in energy firms and even banks, many highly profitable companies are available with yields close to 3%. Dividend stocks are not bonds, and are not immune to stock market declines. However, we think the extra return potential from allocating a small portion of your bond portfolio to dividend stocks (5-10%) is worth the added volatility in this case.
  • Lastly, while bond investors tend to focus exclusively on income potential, remember, bonds serve another perhaps more important purpose: diversification. In other words, bonds aren’t stocks, and when the stock market falls, high quality bonds tend to hold, if not increase, their value.

    We think making these small changes can increase the income potential of your portfolio, while maintaining much needed diversification.

    Source: ogorek.com

    Simply Save podcast | Filing your income tax returns? Here’s a do's and don'ts checklist

    Simply Save podcast | Filing your income tax returns? Here’s a do’s and don’ts checklist

    December 31, the extended due date for filing income tax returns for the financial year 2019-20 is drawing closer. It is important to complete the process by this date to avoid delayed refunds and penalties that can result from delayed filing.

    It’s best to start the process well ahead of the deadline so that technical glitches or unavailability of information or documents at your end do not mar the exercise at the last minute.

    It is also an opportunity to claim tax deductions you might have missed out on in your investment declaration filed through your employer. In addition, you must ensure that you avoid common errors that many tax-payers make so that the process is hassle-free. Errors could be as minor as choosing the incorrect assessment year. You must remember that now you will be filing income tax returns for the financial year 2019-20 and, therefore, the assessment year is 2020-21. You should also ensure that you verify your income tax returns after submission, without which the process will be considered incomplete.

    To know more about such key do’s and don’ts while filing your tax returns, tune into to Simply Save podcast with Keerthana Tiwari and Preeti Kulkarni.

    First Published on Nov 19, 2020 07:14 pm

    Source: www.moneycontrol.com

    Section 80C Deductions: Your Guide To Popular Income Tax Benefits

    Section 80C Deductions: Your Guide To Popular Income Tax Benefits

    Section 80C of the Income Tax Act is one of the most popular and elementary avenues of managing your taxes. If you have not managed your taxes well so far, learning about income tax benefits available under Section 80C laws can be the first step. Many wealth planners emphasize on the importance of income tax benefits available under Section 80C, often considered one of the most popular avenues to save money among salaried assessees. 

    Currently, Section 80C provides for deduction of up to Rs 1.5 lakh in taxable personal income in a financial year under certain conditions.

    Simply put, you can reduce up to Rs 1.5 lakh from your total taxable income making use of Section 80C norms. The Income Tax Department returns any excess taxes paid by you based on your investments in life insurance, provident fund (EPF and PPF), National Pension System (NPS), National Savings Certificate (NSC) and tax-saving fixed deposits..

    Here are some investments which are eligible for claiming income tax benefits under Section 80C: 

    • Premium paid to subscribe to or renew a life insurance policy
    • Unit-Linked Insurance Plans (ULIPs)
    • Tax-saving mutual funds or Equity-Linked Saving Scheme (three years of lock-in period)
    • Provident fund (Employees’ Provident Fund/Public Provident Fund)
    • Payment of stamp duty on purchase of house property
    • Payment of principal amount of a home loan
    • National Savings Certificate (NSC)
    • Tax-saving fixed deposit (five-year maturity)
    • Small savings schemes such as Senior Citizen Savings Scheme and Sukanya Samriddhi
    • Payment of tuition fees (paid to a university, college or school) for up to two children

    One can use a combination of these options to claim an overall deduction up to Rs 1.5 lakh in taxable income.

    Source: www.ndtv.com

    What To Do When Interest Rates Are Near-Zero And You Need Income

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