While RBI did not raise interest rates in its latest policy review, it did so by 50 basis points in recent past. With small savings rates also going up, what should be your strategy on fixed income investments?

Changes warranted in debt portfolio

There should be some changes in a person’s debt portfolio in the current scenario. With the interest rates in the current regime on the uptrend, one should look at the fixed income part of the portfolio more actively. In this situation, even the debt part of the portfolio needs to be actively managed. For senior citizens, if an FD is maturing, I will suggest shifting to Senior Citizen Savings Scheme. For non-senior citizens, I will allocate portions to bank FDs, corporate FDs and debt funds.

One must remember that fixed-income investments serve two purposes. The first is to accumulate or store wealth for short-term goals of up to 3 years or for liquidity. The second is to balance the risks that other asset classes can pose. In other words, fixed-income instruments act as a hedge if invested over the long term as part of a person’s asset allocation.

ALSO READ: How to select the right bank fixed deposit

While investing in debt instruments, one must not get greedy and start looking for alpha. Someone aiming for alpha will have to look at other asset classes like equity.

I don’t suggest adding risks in this part of the portfolio. I don’t recommend long-duration debt funds. Over 5-7 years, short- and long-term debt funds give similar returns.

—Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors

Risk averse should prefer fixed deposit

People invest in fixed-income instruments like bank FDs, corporate FDs or debt mutual funds to avoid risk on their investments and to ensure a fixed income. Out of all the fixed income instruments, bank FDs carry minimum or negligible risk, and are non-volatile. If bank FDs offer returns comparable to returns offered on other instruments in the fixed-income category, they should be given preference. One should look at asset allocation, which is the distribution of a person’s savings into different investment options. For individual investors, it is usually a combination of equity, debt, property and gold or other commodities.

ALSO READ: Latest bank FD rates: What ICICI Bank, HDFC Bank, Yes Bank and Axis Bank offer

A complete analysis of each and every goal vis-a-vis your income and expenditure pattern is needed before you decide on any investment option. Hence, revision of asset allocation should be considered only when your financial plan demands it. Keep in mind that market fluctuations will keep happening; so any decision should be based on your requirements and not on your emotional reactions to the changes.

—Shilpi Johri, Head, financial planning, Arthashastra Consulting

Debt MFs have more benefits than FDs

While interest rates on FDs and small savings schemes are going up, debt mutual funds still continue to be better in comparison due to the benefits that they provide. Debt mutual funds can be liquidated by the investor whenever required. Debt funds also mirror market returns and if one were to hold them for the long term, the person can avail indexation benefit for taxation purpose.

ALSO READ: RDs are not advisable for long-term investing

FDs offer assured returns, but have a penalty for premature withdrawal in terms of lower returns. Moreover, there is no indexation benefit in taxation for interest earned from an FD, unlike debt funds.

In case of small savings, the investments become illiquid for a number of years, depending upon which scheme the amount is invested in.

Those who understand the risks and volatility of debt mutual funds can continue with short- or medium- term debt funds based on the tenure of their need. For most others who may not comprehend debt market risks very well, they could look at FDs or small savings depending on their time horizon and rates on offer.

—Deepali Sen, Founder, Srujan Financial Advisers

It’s better to stick to short-term funds

A fixed income portfolio would constitute a bank FD, corporate deposits, post office deposits, PPF or anything that will give you an assured return which is not marked to market. On existing investments in this category, an investor might feel that he is losing out when the interest rates are going up. In that scenario, one needs to evaluate if the kind of deposit offers an exit or a premature withdrawal without any penalty.

However, most of them charge for premature withdrawals and some do not even allow withdrawal. In such cases, you will have to evaluate if you will be better off renewing it at the new interest rate, or in continuing at your existing rate.

In marked-to-market products like debt funds, the interest rates going up is leaving investors in a lurch because they have come down dramatically. In the current scenario, being in a liquid or ultra short-term fund is the best option. There is no need to go beyond the short-term category.

At the same time, if you want a portfolio with low degree of volatility and a reasonable return and you can lock in your money, then you can consider going for fixed maturity plans. But know that they have a lock-in of 3 years and above.

—Surya Bhatia, Managing partner, Asset Managers

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