With capital gains on debt fund investments now subject to short-term capital gains tax irrespective of holding period, other debt instruments have become quite competitive with debt mutual funds.
Debt investors have been so starved of good returns lately, that any return above 7% now seems like a grand prize. This is why, after the government recently announced an interest rate of 7.7% per annum on National Savings Certificates (NSC) for the April-June 2023 quarter, there was much jubilation. Apart from warranting a fresh look at the NSC itself, this rate hike promises to significantly lift returns on a Central government-backed instrument – GOI Floating Rate Savings Bonds 2020 (GOI FRSB).
The recent furore surrounding the failure of Silicon Valley Bank in the US has exposed that while banking is a favourite sector with stock market investors, the fragility of the banking business is far from well-understood. Banks are held up as the engines of economic growth. Whichever sector grows, the banking sector ultimately gains. Banks are also accorded a higher valuation than most sectors during bull phases. In good times, banks made up a 40% plus weight in our leading stock market indices.
US stocks and US equity funds have been quite a hit with Indian investors in recent years. Indians invest in these funds to gain exposure to global businesses (Amazon, Alphabet, Mastercard etc). More importantly, they would like to gain an exposure to the US dollar which has appreciated steadily against the Rupee over the years.
But the risks in owning US equities have become apparent lately, with the Fed on a rate hiking spree and the US economy flirting with a recession. US stock indices have lost 12-15% in one year, while US equity funds have seen losses of 6%-12%. But there has been a sharp rise in yields on US government bonds (treasuries).
We bet you must be tired of hearing about rate hikes and debt funds and strategies! But if your queries, comments and activity on our newly-launched PrimeInvestor Community are any indications, there are still several questions many of you have over your funds.
So, here’s collecting them all and explaining what you should be doing with your debt funds and if you need to do anything different in light of the latest round of rate hikes.
With popular NBFCs such as Sundaram Finance, HDFC and Bajaj Finance revising their deposit rates in the past year, FD investors can finally look forward to better returns, after a long drought. Rising demand for loans in an improving economy, is forcing NBFCs to compete actively for deposits once again, prompting even top-rated ones to roll out deposit schemes for longer tenures of 4 to 5 years with ‘special’ rates. Sundaram Home Finance is offering 7.65% on its 4-year FD and HDFC has a special offer of 7.6% running its 45-month Sapphire Deposit scheme.
But are these rates special enough for you to lock in your money for longer tenures of 4 or 5 years?
After bungee jumping off a cliff, it is good to wait for the adrenaline rush to wear off. Indian bond markets are in exactly this situation now. After falling sharply as rates rose, bond prices are pausing to take a breath. In our debt outlook last year we expected rates to continue their upward climb and recommended strategies to play this. During the course of 2023, we think interest rates could top out and stabilise. We tell you what this will mean for your debt portfolio.
With better credit offtake and improving upgrades in credit rating, at PrimeInvestor, we think it may be time to selectively take calls on bonds that compensate well for the risk taken. In this report we cover one such privately placed bond.
At PrimeInvestor, we took an ultra-conservative approach to debt investments during Covid and just after it. But with economic recovery taking root, interest rates rising and credit offtake improving, we believe investors can shoot for higher yields by taking on some credit risk. Perpetual bonds from banks with sound financials are one option, offering good reward for risks taken. We are covering one such bond here.
Low interest rates and rising inflation are a dilemma for savers. There is a constant conflict between risk and return. As far as the retail investor is concerned, he looks forward to being ‘protected’ by the regulators. Financial literacy does not come easy and ninety percent of us would not know the difference between a fixed deposit and a debenture. And we would be forgiven in thinking that the term ‘secured’ debenture or bond means that every rupee we invest is safe! But where should we draw the line in the search for high interest rates?
It is the fashion for personal finance gurus and social media influencers to begin their talks by dissing FDs. FDs are dumb investments, they say, before urging you to migrate to equities, or exotic things like options trading or covered bonds.
But the humble fixed deposit can serve a very useful purpose in your portfolio by acting as a source of ready liquidity and acting as a bedrock for your safe money. That’s why we have Prime Deposits, our list of FD recommendations. It is quite possible to generate positive real returns on your FDs through an active strategy. But can an active strategy really go with FDs? Of course! Here’s how you can do it.
Whenever we recommend SDLs, our readers raise many queries like “Are SDLs safe?” and more about the difficulty of choosing them. In this FAQ, we try and address all of your niggling doubts about SDLs.
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