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Long-term returns of gold and fixed income should be similar: Invesco MF

Our debt portfolios are focused on bonds with high credit rating

August 25, 2020 / 09:18 PM IST

If you are a fixed income investor who needs regular income, then falling interest rates are a serious dampener. Sujoy Kumar Das, head-fixed income, Invesco Mutual Fund suggests ways to manage your fixed income portfolio in a conversation with Moneycontrol’s Nikhil Walavalkar. Excerpts:

Reserve Bank of India (RBI) has aggressively cut interest rates and infused liquidity. Given the high inflation numbers in the recent past, will RBI cut rates?

The current pause in the policy rate cut cycle is temporary on the backdrop of high inflation numbers. The banking regulator will keep track of the situation for some time and see if the government addresses supply side issues that have caused higher inflation. After the supply side issues are addressed, inflation should come down. RBI will then assess the growth situation and further cut policy rates aggressively, if required.

We have seen negative real rate of interest in India. If the situation persists, will it be wise to invest in fixed income avenues?

Fixed income investments offer safety of capital, reduce portfolio volatility, bring in steady returns and ensure liquidity. Hence fixed income serves as a solid base of your wealth pyramid. When real rates turn negative, investors do consider investing in other riskier asset classes. However, investors should continue to invest in the fixed income space taking into account their income needs, financial goals and risk-taking ability.


Small saving schemes are still offering high yields. Why shouldn’t investors prefer those over bond funds?

The rates of interest payable on various small saving schemes are administered by the government and not really market determined. Though these schemes pay higher interest rates, they are not as liquid as bond funds.  Also, gains on investments in units of bond funds held for more than three years are taxed at 20 per cent after indexation. Hence, small saving schemes makes sense only for investors in low income tax slabs and those willing to forego liquidity. Bond funds make sense for you if you are in higher tax slabs, looking for better post-tax returns and liquidity.

Which are the attractive pockets in bond funds for investors as of now?

Investors should stick to debt funds investing in government securities and high-quality corporate bonds. The best way to choose the right bond fund is to match your investment timeframe with the modified duration of the scheme. This ensures that you do not suffer from intermittent volatility caused by changes in interest rates. If you have been investing in bank fixed deposits of nationalized banks or top private sector bank and looking to invest in bond funds for higher returns, stick to corporate bond funds. Avoid getting into credit risk funds with low rated bonds for high returns.

Do you see credit risk going up as moratoriums end? Do you foresee more defaults? Are you taking some special precautions for such a situation?

After the end of moratorium on loans, we may see defaults on loan repayments by borrowers in the economy– be it a corporate or an individual. The environment is not conducive to take much credit risk. Investors should remember that bond portfolios comprising low-rated bonds offer high yields, but they also come with high credit risk and low liquidity. Our debt portfolios are focused on bonds with high credit rating. You should avoid investing in low-rated bonds at this juncture.

Gold prices have run up a lot in the last one year and investors are still positive about its prospects. What is your view on gold?

In the long term, returns offered by gold and fixed income should be similar. When the rate of interest on bonds go down, gold prices rise fast. When the rate of interest on bonds rise, gold does not offer much returns. Gold can be an attractive alternative for fixed income investors. However, do not go overboard on gold looking at past returns. As long as interest rates are headed southwards, you can expect gold prices to rise.

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Nikhil Walavalkar
first published: Aug 24, 2020 10:57 am
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