The stock markets have been in bearish mode over the last few months. As a result, returns on equity-based market instruments have been quite unattractive, with even negative returns in some cases. The fall in the equity markets is due to many factors. Several negative developments in global markets, a sharp rise in commodity prices globally, high inflation rate etc.
The Reserve Bank of India (RBI) and the government have taken several measures to control this situation like tightening liquidity, hike in interest rates, check on major commodity prices etc. Analysts believe that these negative sentiments will continue in the stock markets for a few more quarters and therefore the stock markets will remain volatile and risky.
Investors with a low risk appetite should reduce their equity exposure and allocate a larger portion of their total investment basket to debt instruments which offers attractive returns in the current high inflation and interest rate scenario.
Debt instruments include corporate debt, money market instruments, debt mutual funds, bank deposits, public provident fund etc. The main objective of debt funds is preservation of principal, accompanied by modest returns. Investments in debt funds are also suggested for investors with a short-term investment horizon. There are many debt investment instruments available in the market and you should choose them judiciously, based on your investment objectives and the deal on offer.
Some debt instruments available in the market:
Debt mutual funds:
Debt mutual funds invest in safe instruments like corporate debt, money market instruments, call money etc. They secure the corpus and yield modest returns. Many debt mutual funds have rolled out fixed maturity plans that offer 10 to 11 percent returns annually. Liquid mutual funds, in which investors can park temporary surpluses, are now offering healthy returns of 8-9 percent per annum.
In fact, many institutional investors are parking their funds in the domestic debt market. The high interest rate differential between domestic and overseas interest rates is prompting this. For example, in the US, the Federal Reserve has cut rates substantially over the last few quarters.
Returns on bank deposits have gone up by 2-3 percent this year due to rate increases by the Reserve Bank of India (RBI). Many banks are offering special deposit windows for 1-2 years’ maturity fixed deposits that offer annual interest rates of 10-10 .5 percent.
Bank deposits are also good for short-term investors – less than three months. Short-term bank fixed deposit offer 6-7 percent returns. Nowadays, many banks provide funds sweep-in /sweep-out facility where a balance beyond a certain limit automatically gets converted into a fixed deposit and these pay much higher interest rates than savings accounts.
Investments in commodities (especially gold and silver) are an attractive option for debt investors. Investments in commodities have yielded very good returns over the last few quarters and analysts believe that more money is pouring into the commodity market due to the negative sentiments prevailing in the equity markets.
Property is a good investment option for long-term investors as its prices have corrected recently in some places. Investments in property offer short-term returns in terms of rental income and a long-term return in terms of capital gains.
Debt funds with short portfolio maturities are better off during rise in interest rates since they are able to shift to high rate debt securities more easily. This is because they are not locked into long-term debt paper offering low interest rates. For instance, a debt fund which has invested in a debt security offering 5% interest whose balance tenure is 10 years, will see a fall in the market value of the debt paper with Interest rates rising. However, a debt fund which has invested in a debt paper offering a lower interest rate (say 4%) whose balance tenure is say, 1 year, will not see much of a fall in the market value of the debt security in case of a rise in Interest rates.