The coupon rate announced last week was below 7%. The rates on one-to-three year bank fixed deposits (FDs) currently stand at 7-7.5%. And there is a strong likelihood that they are going to fall in the months to come.
"Bank FDs will become unattractive going ahead. The returns could turn negative, if you take into account inflation, which is at 5.5% and taxation. If you have a bank FD coming up for renewal, you should look at other fixed income options like corporate FDs or debt funds. The difference in the returns between these investments and bank FDs is about 1-1.5%, based on the time duration,'' says Dinesh Rohira, Founder and Chief Executive Officer, 5nance.com.
Corporate FDs of high rated companies give between 8-9%, while the returns on short-term debt funds are around 10-10.5%. While investing in corporate FDs, investors must always look at the pedigree or rating of the issuer. It is advisable to invest in 'A' rated companies. If you can take moderate risk, then you can also look at 'B' rated companies because these too give reasonable returns, and the companies issuing them have sufficient pedigree.
The recent Non-Convertible Debentures (NCDs) issued by some corporates, especially non-banking finance companies, are also a good option. In this case too, look at the track record and financial strength of the issuer company before investing.
"Retail investors typically stay away from such instruments because they don't understand them well enough. However, today since it is possible to invest online, accessing them is not a challenge," Rohira adds.
Fixed income investors can look at either the accrual strategy where the focus is on income or a duration strategy where one looks at capital appreciation because of interest rate movements. Fixed deposits, Fixed Maturity Plans (FMP), NCDs and short/mid -term funds are more suitable for an accrual strategy.
Duration strategy looks at capital gains due to interest movement. Higher duration funds and dynamic bond funds are more suitable for a duration strategy. Some amount of funds can be put in duration funds to take advantage of the interest rate movement, given that rates are set to come down now.
Abhishake Mathur, head-investment advisory services, ICICI Securities says that for retail investors who are dependent on interest income, such as retirees, it is advisable to stick to an accrual strategy for their core portfolio.
"For retirees, fixed income investments should give stability to the portfolio. Hence it is preferable to invest in FMPs, short- medium duration funds, fixed deposits especially if you require funds or are dependent on the income. Retirees should look at investing part of the corpus which is likely to be consumed after five to six years into growth assets like equities,'' he says.
Investors can also look at gilt funds for medium term investments, even if these could be more volatile than say income funds or short-term funds. The fall in interest rates is not likely to be very sharp. So, the volatility will not be much.
