Ideally you should be investing in these products with a three-year time frame to benefit from the tax treatment for long-term capital gains
Fixed deposit rates are on the decline, with the RBI steadily cutting rates over much of this year. Fixed income investments that offer a blend of safety and returns are hard to come by. In this light, Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund explains to Nikhil Walavalkar on how individuals should be investing their fixed income allocations.
Q: The Government has cut corporate tax rates. Will the government cut personal income tax rates or resort to direct cash transfers?
A: From a fiscal deficit point of view, the corporate tax rate cut impact is around 0.7 per cent of the gross domestic product for the financial year ending March 31, 2020. This is a significant boost for the economy. There are two ways to give a boost to the economy – either do a corporate tax rate cut or do a personal income tax cut. But in our view, a corporate tax rate cut is probably better. Because, while a personal income tax rate cut leads to an immediate increase in consumption, a corporate tax cut gives more money to corporates, which can be then be used to cut costs and pass on the benefits to the buyers or can also be used to invest. Cutting corporate tax rates has a long-term sustainable impact on growth.
The government has mentioned that there could be additional sops on the way. It has also increased the dearness allowance for central government employees by another 5 per cent. This is putting more money in the pockets of the people and looking to boost consumption. We can expect more such steps from the government.
Personal income tax cuts may happen only after assessing the overall impact of the corporate tax cuts and after looking at the budget and revenue raising measures.
Q: The RBI cut rates by 25 basis points recently. That makes it a collective 135 basis points cut since February 2019. How many more rate cuts or liquidity enhancement measures are expected?
A: We foresee 25 to 50 basis points cut in policy rates by the end of March 2020.
Q: Though the RBI has been cutting the rates aggressively, the government has kept small savings schemes’ rates more or less unchanged. How should investors understand this and make their investments?
A: Though small savings rates have not fallen much, we will see some downward pressure, going forward, on small savings rates. While investing in fixed income, one should look at the broader trend of interest rates represented by savings rate and short term (one, two and three years’) fixed deposit rates, which are certainly headed lower.
Q: What are the options for retail investors in the fixed income space?
A: Emergency funds or even something which investors would need in the next three to nine months should be invested in liquid and overnight funds.
The remaining money can be invested in simple short-duration mutual fund schemes investing for one to three-year time frames. Here, you get higher yields compared to fixed deposits without compromising on quality as you are investing in AAA-rated bonds. Ideally you should be investing in these products with a three-year time frame to benefit from the tax treatment for long-term capital gains. Do not invest in long-term or very sophisticated products. For high net worth individuals or evolved investors with the experience of investing in mutual funds and having a higher risk appetite can consider credit risk funds, given the higher yields available. This should not be a large allocation.
Q: How do you see the recent regulatory changes in liquid funds impacting the risk-reward associated with them? How do they compare with overnight funds after the recent changes?
A: Overnight funds invest in instruments that mature in a day's time. So, in that sense, it becomes the safest option. There is no liquidity risk at all in overnight funds. Investors looking for zero risk fund, should go for overnight funds.
By April 2020, the new regulations prescribe that the entire portfolio must be valued on a marked-to-market basis. This tightening of regulations makes liquid funds a safe investment option. Recent regulatory changes are unlikely to lead to higher volatility in liquid funds, as the fund holdings and positioning are also being realigned in light of these changes. For instance, the average maturity of the fund which is an indicator of the average tenor of the individual securities is now less than in the past. This reduces the extent of volatility on days when there are yield movements based on changing market conditions.
As far as the yields are concerned, liquid funds earn 30 to 40 basis points more than the overnight funds.
Q: Is there a case for investing in gold?A: We have seen gold doing well in cycles. Gold is a safe haven investment. At times of heightened risk, due to investors taking the flight to safety, gold does well. But one must keep in mind that gold does not earn any return, like bonds or stocks do. The only return you make is capital appreciation over a long period. We do not have a view on gold prices. As a rule of thumb, one should have up to 15 per cent allocation to gold.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.