Look at debt investments for healthy returns in medium term

Adhil ShettyBankBazaarStock markets are driven by company fundamentals, economic growth prospects, and investors’ sentiments, all of which are unpredictable to various degrees. This presents investment risk, which conservative investors would be hard-pressed to take.

Today the markets across the world are interlinked – monsoon is predicted to be below normal, important Bills are stalled in Parliament, and the overall world economic growth is not very encouraging. In short, the business climate does not look very inviting.In such a scenario, investing in the stock markets may not be everyone’s cup of tea, especially those investors who have neither a longer investment horizon nor any familiarity with stock markets. The way out for them is to invest in fixed income securities or debt instruments.Fixed income securitiesFixed income securities are so called because any investment in them provides fixed returns to investors periodically. At the end of the tenure, the investor can redeem the asset and receive the principal with interest of the current year.

The certainty of returns is what makes debt investment attractive to investors who do not want to take risk in stock market. Let’s take a look at the types of fixed income securities available for investment.Bank deposits: This is the most common type of fixed income securities that most investors are familiar with. Almost all of us have savings, current, recurring deposit or fixed deposit accounts in banks. Banks give you a fixed return on our deposit. These deposits with nationalised banks are almost risk-free.Government backed securities: These are bonds and other fixed income securities issued by the Government of India. From time to time, Governments issue bonds so that they can raise money to spend on infrastructure development, social spending. These bonds pay a fixed income on the investment. In addition to government securities other government backed securities include, KVP (Kisan Vikas Patra), EPF, PPF. Since the investment is backed by the government, it is risk-free.Corporate bonds: Companies need money to expand business, acquire companies, enter a new line of business, and many other business-related decision. They raise money in the form of equity or debt. The debt option comes under company bonds. In this case, companies issue bonds with a specified interest rate or return. The investors receive interest at periodic interval. For example, a coupon rate of 4% half-yearly on the face value of bond of Rs 1000 will provide Rs. 40 to investors every 6 months.Bond funds: Bond funds are mutual funds that invest in a set of bonds. The bonds can be government securities, certificate of deposites issued by banks and corporate bonds. All mutual fund companies have multiple bond funds or debt funds with investment objectives clearly defining the set of bonds they are focussed on. Investors can check the portfolio of bond funds and decide what is right for them.A note on returns from bondsExcept in cases of deposit-related investments such as bank deposits and PPF which are not traded in secondary market, most bonds provide returns in 2 ways: by periodic coupon payment and by capital appreciation when the prices of bonds go up. Usually bond prices go up when the interest rate goes down and vice versa.Important points for investorsDebt funds are the best instruments for protecting your money. The returns are attractive and keep pace with inflation rate. Hence, you get the benefit of protection of money as well as return enough to beat inflation.Invest in bonds when you have short to medium term view. For example, suppose you have 10 lakhs and you want to use it to buy a home in the next 3-5 years. The best strategy will be to invest in safe assets. You do not want to put this into the stock markets and possibly encounter losses just when you need this money. When investing in bonds, don’t just go by the interest rate offered by the company. A high interest rate may look good but it may not be backed by a sound business, thus putting your investment at risk. You have to check the rating of the bond. Bond offering undergo a rating process. The rating agencies provide a rating to the bond capturing the ability of the company to pay the interest as well as principal to the investors. Check the rating before you invest. Stick to AAA rated and AA rated bonds. Avoid bonds with lower ratings.