Low-risk investors with a preference for debt investments are a confused lot. They don't know where interest rates are headed. Rising inflation would suggest that rates should be hiked to tame inflation. Another school of thought suggests that interest rates should be lowered to avert a slowdown. While these are issues for the RBI (Reserve Bank of India), as far as the investor is concerned, the interest rate scenario is uncertain and hence his investments must deal with the situation effectively. We present four debt investments that can aid investors to beat the uncertainty.

1. Liquid/Liquid Plus funds
For investors uncertain about the interest rate scenario, liquid funds (including liquid plus funds) are an important ally. Liquid funds invest in short-term securities (like money market instruments and call money), so interest rate risk is low, low enough to deal with uncertainty. It is ideal for investors who wish to park their monies for shorter time frames (like even a day) until a clearer scenario emerges on the interest rate front.

Liquid plus funds invest in slightly longer dated paper so the interest rate risk moves up a bit. And unlike liquid funds, the typical investment time frame for liquid plus fund investors is usually (at least) a week. If the investor needs his money sooner than that liquid funds are a preferable option (since liquid plus funds impose an exit load on premature withdrawals).

Since portfolios of most liquid/liquid plus funds are comparable, expenses charged play a part in determining the returns; hence more competitive (read lower) the expenses, better the returns.
 

2. Floating rate funds
Floating rate funds (or floaters as they are called) are just as critical in an uncertain interest rate scenario. These funds invest in floating rate debt instruments wherein the coupon rate is revised at regular intervals. Uncertainty in interest rates does not significantly impact the prices of floating rate instruments, because the coupon rate is adjusted (either lower or higher depending on the interest rate scenario) in response to the market rates. Again, given that portfolios of floaters are largely comparable, lower expenses are crucial in clocking a competitive return. While floaters come in both variants (short-term and long-term), opt for short-term floaters, which allow investors to redeem any time without paying an exit load (long-term floaters usually have an exit load on premature redemptions).

 

3. Short-term FMPs
Fixed maturity plans (FMPs) have become popular amongst investors mainly as a foil for uncertain interest rates. FMPs by staying invested in a portfolio of bonds/government securities till maturity offer a relatively certain return despite their market-linked nature. During periods of uncertainty, the certain return offered by FMPs assumes even more significance. While FMPs are launched with varying tenures, go for the short-term FMPs (less than a year). If the interest rate scenario appears uncertain even after the FMP matures, you can consider rolling over to the next issue (provided the fund house is offering another FMP with a similar tenure).

4. Short term FDs
While FMPs are an innovation, fixed deposits (FDs) are as old as the savings bank account. Investors looking to lock their return during uncertain times can opt for short-term FDs (less than a year). On maturity, they can reinvest the monies in the FD for a similar tenure if there is still no certainty in the interest rate scenario.

Add Comments