‘Bond’ with the best

There are better debt options available, than low-interest bank fixed deposits

Published - December 13, 2020 10:46 pm IST

UNSAFE-SAFE Hanging Word with Scissors on Chalkboard Background - 3D Rendering

UNSAFE-SAFE Hanging Word with Scissors on Chalkboard Background - 3D Rendering

Are you among those bitten by the painful debt mutual fund episodes between late 2018 and 2020? Have you once again reluctantly moved to the comfort that bank fixed deposits (FDs) offer but crib about the low rates? Take comfort from the fact that there are other better, and more sound debt options emerging. Most of them are indeed market-linked, but without the high credit risk or liquidity risk that you may have experienced in the last few years in mutual funds (MFs). Here are five such options:

For income earners

Floating Rate Savings Bonds 2020, issued by RBI, is among the best-guaranteed investment products for the current interest scenario. That it is floating rate means that your interest is not the same over the seven-year tenure.

However, given that we are at a low-interest scenario now and the current rate of 7.15% is pegged at 35 basis points above the NSC rate, you can secure a higher rate with this instrument as rates move up in future. This is an ideal option for those seeking some regular income.

While this instrument is supposed to be made available in SBI and other major banks, you may need to push your banker to offer this to you.

For those a little more adventurous and used to capital markets (and having a demat account), buying treasury bills and gilts (government securities) through the primary auction is now possible even for retail investors. Treasury bills with tenures of 91, 182 and 364 days, and longer tenure gilts are available on primary issue. You can check with your broker whether the same is made available through them. A minimum amount for a bid is ₹10,000. This is an auction, which means you will know the ‘yield’ only after the competitive bidding process.

For more seasoned investors, longer dated gilts are available in the secondary market as well. These can offer safety and interest income. However, as discussed below, if you lock into these in a low-interest scenario, they won’t make for good income products. For those who believe safety is paramount, these can be great options, provided you understand how prices move in the debt market.

Growth options

In the mutual fund space, while credit and liquidity risk has painted a bleak picture on the safety of debt funds, the industry has also been coming up with quality products with lower risk.

The Bharat Bond ETF and the Nifty CPSE Bond Plus SDL are examples. The Bharat Bond ETF from the Edelweiss house, which invests in high-quality PSU bonds, is India’s first fixed maturity ETF.

It allows you to simply hold the ETF till maturity or sell the ETF in the exchange when you need liquidity.

The Nifty CPSE Bond Plus SDL ETF from Nippon India is also a target maturity debt ETF. Its portfolio, however, will have an equal mix of PSU bonds and State development loans (SDL); the latter typically carries high coupon. What is to be noted in these two products is that they significantly reduce credit risk and liquidity risk but not interest-rate risk.

That means their prices will swing to interest rate changes. Like all other debt instruments, their prices will rally when rates fall and move up when rates increase. So, the key to look for is the ‘yield’ in these bonds.

Enter when rates rise

If you want to simply buy and hold, it makes sense to enter such bonds when rates move up.

That way, you will be buying at lower prices and lock into higher yields for the rest of the period. This strategy is ideal for those who wish to buy and hold them. Both these products hold potential to generate higher returns than your FDs with higher tax efficiency (long-term capital gain indexation benefit if held for more than three years).

What you should know, though, is that you can have marked-to-market losses in these products during the tenure of your holding. But if you hold them to maturity, your returns will be close to the yield at the time of your entry.

The biggest upside is their liquidity. You can sell them at any time. You will need a demat account to invest in these exchange-traded funds. However, these schemes are also available in a fund-of-fund structure for those who don’t have, or want, a demat account.

Retirement option

The NPS Tier II account, although not a tax-saving option, provides a great opportunity to build wealth.

Specifically, the corporate bond (C) and government bond (G) are quality options for long-term debt allocation. Their credit risk is minimal, albeit with ups and downs, so the rate cycle will be felt in the value. But this evens out over the long term.

The two most attractive features here are the liquidity (no lock-in like with NPS Tier I) and the low cost (compared with mutual funds). Of course, you cannot have an NPS Tier II account, without opening Tier I. The other limitation is that the taxation of Tier II is still unclear.

All these options are at their early stage of product lifecycle and you will see them evolve and deepen the debt market. For retail investors, they can be good vehicles to ride, without (or almost without) fear of defaults.

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