Where do you invest your money today?
RBI shocked us all by keeping the interest rates intact. So what does this mean to the investors? While this does pose problems for those who have taken loans or propose to take loan, there are positive aspects even in this situation. Financial Advisor Suresh Sadagopan discusses various fruitful investments to look at the current interest regime.
RBI has come out with it's credit policy review and nothing has changed. Is it a good thing or is it terrible, like the stock markets seem to think.
RBI is correct in pointing out that interest rates being high are not the only reason for tapering growth in the economy. RBI is worried about greater money supply and the consequent inflation if it brings down the CRR. This means that interest rates are expected to stay where they are. That is bad news for borrowers. RBI also has not given any timeframe for bringing down the rates and has indicated that fighting inflation is top of it's agenda.
While this does pose problems for those who have taken loans or propose to take a loan, there are positive aspects even in this situation. Since the interest is unchanged, the deposit rates are going to be available at the current good rates.
Fixed deposits: No rate change means that you have access to good interest rates for your Bank FDs, which is currently between 9-10% for varying tenures. That is going to be available for now. Company FDs, which can offer 1-2% more, would continue too, considering the tight liquidity conditions. That is good news for all those who think about fixed deposits, first and last.
Fixed Maturity Plans (FMPs): It would be attractive to invest in FMPs (issued by Mutual Funds) now, as CD & CP rates are in the region of 9.6-10%, for a 12 month tenure. If you are in the 20% bracket or more, you could lock-in on these attractive rates and also get the benefit of indexation, if the FMP flows into two financial years. The post tax yield should be 9% plus, in such a case. The unknown is the DTC itself, which can still undergo modifications. In what form it will come in and whether it will also be applied for past investments, remains to be seen. But even if it is applied and FMPs one has invested now are treated like FDs for tax treatment, the post tax returns will come to the level of FDs. Hence, there is definitely a case for considering FMPs.
Debt funds from MFs: The yields for papers (CP/ CD) below 90 days is between 9.3-9.6%, which is attractive. If you need to keep your liquidity intact and earn some very decent returns, you could look at Ultra short-term funds. A post-tax yield of about 7.5% plus is what you could expect here. Even longer tenure bank deposits cannot match this. Take full advantage of this when it is available.
Debt funds of 1-3 year durations are also doing well. These funds will invest in Commercial papers (issued by companies), Debentures, Bonds, Structured obligations, Certificate of deposits (issued by banks) etc. Depending on the portfolio they hold, they will be able to offer yields based on the papers held. Some funds may actively churn the portfolio. Others may hold to maturity, assuring for themselves the coupon rate. There are actively managed funds (like dynamic bond funds) where the fund manager takes an active call on the duration and the kind of products to be held. These may work well as the fund manager will manage the portfolio and provide returns, based on the unfolding situation.
There are longer duration funds called by various names like medium term funds, Income funds etc., which may have durations exceeding 3 years. The portfolio will comprise many of the papers mentioned earlier like Commercial Papers, debentures etc. and may also have exposure to Government Gilts. The longer duration papers generally have higher volatility. In a falling interest rate scenario, these funds would tend to offer the best possible returns. But, these are some of the most volatile among the debt funds and one should invest with caution. Even here, the fund managers actively manage the portfolio and bring in appropriate products with suitable durations. That may be the best bet.
Equity schemes: The view that equity markets should be avoided as it is not offering good returns, is misguided. One should invest when it is low. As per asset allocation principle, the equity portion will have to be augmented to maintain the allocation suggested. So, in any case, there is no case for exiting what you already have.
Since the markets can go even lower, investments over time, is suggested. SIP investments continue to be the best option for investing in equity assets. In case of lump-sum investments, the amount can be invested in a liquid fund and can be transferred overtime, into Equity funds. Investing when the market is low is the only way one can make money.
There are lots of good investment avenues for the investor even now. Investors should take advantage of them, when it exists.
The author is a Principal Financial Planner at Ladder7 Financial Advisories. You can reach him at firstname.lastname@example.org