Many times, the timing of investment in an asset class determines how remunerative it can be. This could be the right time to invest in a particular asset class.
Many aggressive investors chasing high returns allocate more money to stocks and equity mutual funds.
In a bull market, many find investing in fixed-income instruments unattractive. However, this may not be entirely true.
Allocating some money to fixed income can stand in good stead for prudent investors.
Let us understand the key arguments which favour this idea.
An increase in interest rates has generated interest in fixed-income products.
The Reserve Bank of India (RBI) increased the repo rate by 250 basis points since May 2022.
Even though in the past five reviews, policy rates have not changed, liquidity in the system is still going down. In the last quarter of a financial year typically liquidity goes further down and rates firm up.
Demand for money is increasing. According to India Ratings Credit Tracker, February 2024, public sector banks’ certificate of deposit (CD) issuances amounted to ₹1,104 billion as of February 28, 2024, compared to ₹620 billion in January 2024.
Private sector banks have issued ₹365 billion CDs as of February 28, 2024, compared to ₹310 billion in January 2024.
Good old fixed deposits for one to two years are offering as high as an 8 per cent rate of interest.
High-yield bonds with a credit rating of AA and below may appeal to relatively aggressive investors looking for higher returns.
Investors in high tax brackets may find tax-free bonds listed on stock exchanges attractive.
10-year benchmark bond yield quotes at 7.05 per cent which makes even long-term government securities investment worthy.
Tight liquidity conditions are expected to persist till the end of the financial year on March 31, 2024.
This presents an opportunity for fixed-income investors.
Current interest rates need to be seen in the context of expected inflation.
According to RBI’s estimate inflation is expected to be around 4.5 per cent in FY25.
Though this is above the targeted rate of 4 per cent inflation, it leaves investors in fixed income with real return.
Real return or real interest rate is computed by deducting the rate of inflation from the nominal rate of interest.
So, for example, if a bond pays a 7 per cent rate of interest and inflation is 5 per cent, then the real return is at 2 per cent.
The higher the positive number the better it is for a bond investor.
However, this high positive real return may not last long.
Interest rates have peaked globally and India is no exception.
Long-term bond yields are falling. Though there is no clarity about the quantum and timing of the cut in policy interest rates, there is an expectation that RBI may reduce it by 50 basis points in the second half of CY24.
Another factor that works in favour of downward-moving bond yields is the flow of money into long-dated government securities.
As Indian bonds are included in global bond indices in the next one year, there is an expectation of large-scale bond buying by foreign investors.
This augurs well for lower bond yields. Lower bond yields should push up bond prices.
That in turn should offer capital gains to investors.
Debt funds investing in long-duration bonds as well as medium-duration bonds may reward investors over the next 18-24 months.
In addition to the possibility of earning lucrative returns from debt funds and bonds, investors need to look at fixed-income exposure as a means to reduce risk in their portfolios.
Diversifying investments across asset classes—stocks, bonds and commodities, matters a lot.
Though financial investments play a key role in achieving financial goals, one has to carefully plan it.
Some of these goals are non-negotiable. They can neither be postponed nor can be avoided. For example, funding retirement and children’s education.
Investing all the money in risky assets – equities can invite trouble. This is especially true when one’s financial goal is short-term in nature.
Money required to fulfil a goal due in the next couple of years needs to be invested in fixed income.
Also, bonds or debt funds play a key role in planning for long-term financial goals.
Strategic asset allocation of an investor needs to be in place and asset rebalancing needs to be done at regular intervals—at least once a year.
After a big rally in stocks and lucrative fixed-income investment opportunities on offer, this may be the right time to rebalance the asset allocation, if one is over-invested in equities.
(The author is the CEO of Choice Equity Broking and a board member of its listed parent company Choice International)
Disclaimer: The views and recommendations above are those of the author, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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