Options in debt instruments

Debt based instruments usually have the nature to guarantee the principal amount of the investor and hence come with lower investment risk in comparison to equity based instruments. Few years ago small investors used to invest most of their money in debt based instruments due to limited availability of other options, for example Deposit schemes (Bank Fixed deposits, Post office deposits, company deposits), debt mutual funds, saving schemes (PPF, NSC) and liquid funds etc. However, there has been a major shift in the personal finance sector during the last few years. Many innovative and hybrid investment instruments have been introduced in the market in personal finance space which has made this space more interesting and confusing.

Debt instruments should be part of every investor’s investment portfolio. Inclusion of debt based investment instruments provides stability to the portfolio and reduces the overall portfolio risk. However, the percentage allocation towards the equity versus the debt based instruments should depend upon the risk profile of the investor and the study of prevailing market conditions. Although debt instruments are considered a relatively safe investment option, there is a hierarchy of risk even among these. In fact the pure debt based instrument does not provide the returns even to cover the ongoing inflation rate which means a negative return on a net basis. An investor has to look for the trade-offs between risk, return and liquidity while making an investment decision.

These are various types of debt based investment instruments available in the market:

Small savings schemes>>>

These are government schemes or bank deposits and therefore one of the safest investment instruments available in the market , for example bank deposits, public provident funds, National Savings Certificate etc. The returns net of tax are attractive under most of these schemes as they offer tax benefits. However, most of these schemes are not very attractive in terms of liquidity (usually these schemes come with a long term lock-in period).

Liquid funds:

These instruments are very good options for the short term investment needs. They provide maximum liquidity, however much lesser returns than other debt based savings schemes. Liquid or liquid plus funds come with a lock in period of a maximum of three days. The funds in liquid funds are as liquid as savings deposit. The returns in liquid plus funds is slightly higher as they come with higher lock-in period as well. Therefore, if an investor is parking a big amount of money for short term, he can look for investing it in liquid /liquid plus funds.

Company deposits:

For company deposits, again investors should check the investment ratings by rating agencies. The returns offer on company deposits floated by blue-chip companies are similar to regular bank deposits. On the other hand, from a risk perspective, NCDs are less risky than company deposits as they are secured against some assets.

Hybrid products>>>

There are a lot of hybrid types of products that offer a balance with respect to risk versus returns. Some of these instruments offer a fixed percentage of investment allocation towards debt and remaining into the equity with the option to investor to change the allocation based on his needs. Also there are some innovative products in the hybrid categories which promises to guarantee the principal amount but the returns are linked to some equity based milestones, for example nifty index, returns on top 5 companies etc. These products are based on the derivatives market. Since these are new products, investors should carefully read various terms and conditions before committing large investments into these instruments.

There has been a major revolution in the personal finance space during the last few years. There are a lot of investment options available in the market but the key for success lies in the patience, portfolio balancing and maintaining a regular touch with your portfolio investments and the developments around them. —